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.
This is an important change in strategy for Vietnam because it will now create the pretext for the State Bank of Vietnam (SBV) to move towards ending the decade’s long exchange rate arrangement it has held with the USD.
Periodically I have posted articles related to the dong and its eventual appreciation against the currencies of its trading partners. The nature of such appreciation will be based on the economic fundamentals within the nations and its growing export markets. Vietnam will have to slow exports by appreciating the value of the VND. The balancing of world trade surpluses and deficits will need to be accomplished in the coming years.
The main reason why such rebalancing has not yet taken place is because the US dollar is still being used as the dominant and primary international reserve currency which central banks like the SBV are forced to hold on reserve in order to complete trade transactions. The more USD they hold on reserve the more they have to devalue their own domestic currency to keep inflation in check and not bleed off their foreign exchange reserves through imports. This monetary and fiscal ballot will soon be ending as nations such as Vietnam become less dependent on America as a trading partner.
The ending of the TPP works towards this end as it both forces and encourages Vietnam to embrace its natural and regional partners in a broader and more meaningful trade relationship within the ASEAN economic bloc.
In previous articles we reviewed how the SBV had stated that in order to stabilize the dong they would consider ending the exchange peg to the USD and pegging to the currency of its largest trading partner, which is China, or to a basket of currencies, which could be either the Special Drawing Right (SDR) or a ASEAN unit of account which is structured around the optimum currency area which makes up the ASEAN region.
Based on the new irrelevance of the TPP we can expect that Vietnam will be looking to hang its currency peg within the ASEAN trading bloc with a possible partial floating peg to either the SDR or the Chinese renminbi.
The Trump administration is likely strategizing how best to depreciate the USD as that is one of their stated goals. This aligns with the broader international monetary system objectives of moving towards rebalancing. It also assists Trump in making American exports cheaper which brings more jobs back. The challenge of depreciating the dollar while at the same time increasing interest rates will be the focus for US monetary authorities as well as for other nations, such as Vietnam, who will be severely affected by any such financial crisis or changes in American monetary policy.
This is where the ADBI working paper goes astray. It never considers that the SBV may be forced to make drastic adjustments to its own monetary policies and exchange rate arrangement. The now defunct TPP and a changing geopolitical environment in Asia all but assures that Vietnam, as well as other ASEAN nations, including China, will be looking to reduce the impact of American monetary changes in the region.
The building crisis with North Korea is one of the deciding factors in how this may turn out. It is interesting that the convenience of an exploding North Korean crisis has taken a deep foothold in the aftermath of the TPP. This crisis has provided the US with the pretext for installing a missile defense shield in Asia, which is something both China and Russia feel are disproportionate to the real world threat being suggested by North Korea and its own nuclear missile program.
Could it be that the North is in fact a US puppet state as I have previously suggested, and is being used to rebalance American influence in the region from less dependence on economic control (the end of US dollar pegs) and more on military containment?
We will have to watch carefully as the above scenarios unfold further. Change, when it comes, is usually sudden and without warning. Adjustments to exchange rate methodologies and monetary policies, whether American or Asian, will fundamentally change how the East and West interact with one another. – JC
JC Collins can be contacted at email@example.com
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