It also meant that US dollar debt was cheaper to service, benefiting large firms with foreign currency exposure, the national carrier, Vietnam Airlines, for example.However, this saw the dong become further and further detached from its market value, and by September 2024, per an Article IV Consultation Report from the IMF, the dong was overvalued somewhere between 12.9 and 19.5 percent.It has also seen the bank’s reserves depleted well below the three months’ worth of imports the IMF recommends, below which the risk of a currency crisis increases significantly.
The market reaction
The market has not responded well to this growing risk.
The domestic gold price, for one, has surged well beyond the world gold price, with households seeking safe-haven assets in which to preserve their wealth.
There are few signs of a change anytime soon, either, with Vietnamese media continuing to report long queues of buyers, with some gold stores limiting purchases to just a tenth of a tael.
Interbank interest rates also show warning signs.
The three-month rate Friday was just over 5 percent, signalling banks have significantly less confidence that any money they lend out today will be returned at the same value in three months’ time.
Foreign investors have also been pulling back. Almost US$5 billion in foreign capital has exited the Ho Chi Minh City Stock Exchange since the beginning of 2024, US$1.5 billion of that since the beginning of this year.
At the same time, errors and omissions in Vietnam’s balance of payments (BOP), which are often viewed as a proxy for unrecorded capital flight, reached negative US$24.48 billion in 2024, or roughly 5.22 percent of GDP.
Although the true figure could be even higher, with BOP methodology generally failing to capture all capital outflows.
In short, foreign investors and domestic savers have been reducing their exposure to the dong, with Vietnamese banks pricing in risk ahead.
Where is it now?
Notably, the State Bank now looks to have changed course, allowing the dong to devalue and buying back US dollars to replenish its reserves, presumably trying to claw back some of that risk.
But letting the dong devalue slowly carries its own challenges. Coupled with the opaque nature of the State Bank’s operations, it could further spook investors and accelerate capital flight.
Moreover, there are significant external risks in the pipeline: US tariffs on Vietnamese goods could sharply reduce dollar inflows, while any escalation of conflict in the Middle East could drive up fuel prices, both mounting further pressure on the dong.
In theory, the State Bank could always go back to selling US dollars from its reserves. But with reserves already well below safe levels, renewed intervention now might add risk rather than reduce it.
What might be slightly more substantial, what it has done before, is a one-off step devaluation whereby it reduces the value of the dong by several percent in one go.
This wouldn’t instil a lot of confidence in investors, but it would bring the currency closer to its true market value and may restore some market function.
The more conventional move, however, would be to raise interest rates.
This is generally more market-friendly and familiar to investors, which would make it less likely to cause a significant disruption. It would, however, slow economic growth, which may not be politically palatable.
That is to say, policy makers are coming up fast on a big fork in the road and tough decisions may need to be made.
So, where is it headed next?
In more developed economies, the role of the central banks is to manage inflation, typically by adjusting interest rates. In Vietnam, however, the role of the State Bank is to execute policy at the direction of the government.
The government, however, despite global headwinds, has continued to reaffirm its commitment to reaching 8 percent growth this year. A target that becomes more difficult to reach with each fraction of a percent interest rates rise.
Moreover, inflation has been managed in large part over the last few years by fixing prices of certain goods and either letting private enterprise bear the cost or run up huge debts or simply allowing for goods to run out.
That is to say, it’s very difficult to foresee what might happen next, but the State Bank’s situation does look particularly precarious.
That said, if it does all go too far off track, there is always IMF support as a last resort.
This would, however, come with stringent conditions.
The dong would likely need to be allowed to float freely, and there would need to be structural changes in how the local currency is managed — the State Bank would probably need to be made independent, for example, as was the case with Indonesia in the Asian Financial Crisis.
So, where does that leave it?
Ultimately, at the end of the day, this was the trade-off decision-makers made: securing near-term stability at the cost of future risk.
That is to say, the can has essentially been kicked down the road now for the better part of three years now, and that road now looks to be running out.
