A Pretext for Exchange Rate Adjustments
The Asian Development Bank Institute (ADBI) published a working paper which suggested there was an increased probability of a Vietnamese currency crisis in the event there were sudden international financial shocks or changes in monetary policy. The paper detailed a broad scope of economic parameters and monetary fundamentals to support the thesis of potential overvaluation. Missing data sets included capital flows and changes to the exchange rate arrangement which the dong holds against the US dollar.
It is difficult for the ADBI to make firm conclusions without including information which determines capital flows, such as foreign direct investment, foreign portfolio investment, worker’s remittance, and official development assistance in the nation. None of this was included in the report, so we must consider the conclusions of enhanced overvaluation risks associated with a currency crisis to be somewhat speculative.
Still, there are some patterns which can be assumed based on the Asian Financial Crisis of 1997 and 1998. That crisis was sparked by a strong dollar which put additional stress on the emerging markets in Asia. The incremental and methodical interest rate increases by the Federal Reserve is once again causing concern as it could lead to a stronger dollar and a repeat of the 1997 scenario.
The ASEAN nations and trade bloc have taken some steps to minimize the repeat of such impacts but whether they are enough is not known until the time comes. This is where a currency crisis becomes possible.
The Trump pull out of the TPP (Trans Pacific Partnership) trade deal with the ASEAN nations has forced a restructuring amongst the regional trade group. Vietnam, who was one of the strategic and broad particpants in the TPP, is now forced to look towards deeper integration within the ASEAN bloc to ensure it has access to foreign markets for its exports.
To continue reading please subscribe for full access!