Since the first working week after the Lunar New Year Break, the State Bank of Vietnam–the SBV–has allowed the dong to devalue with the local currency losing about 1.58 percent against the greenback as of close of business Friday, February 28.
This is a significant change of tack for the bank which has spent a good deal of resources trying to protect the dong from depreciating in line with a narrative, purported by key decision makers and the local media, that currency depreciation is not good and to be avoided.
For an emerging economy like Vietnam, however, a cheaper local currency can actually be a good thing.
With this in mind, this article looks at Vietnam’s monetary policy and how it is changing, who benefits from a stronger dong, who benefits from a weaker dong, and how these outcomes are connected.
Vietnam’s monetary policy
Over the past year or so, the US dollar has become increasingly stronger, making currencies all over the world, in US dollar terms, cheaper. Vietnam, however, has been reluctant to allow the dong to depreciate instead using a range of levers and pulleys to keep this from happening.
For one, it has used open market operations, pumping cash into the system through reverse repossession agreements and pulling cash out of the system through treasury bills, on an almost daily basis, with varying degrees of success.
Moreover, there has been quite a bit of jawboning with the bank regularly announcing and reiterating, throughout 2024, its willingness to use its US dollar reserves to keep the dong from devaluing.
Notably, it has followed through on multiple occasions, spending roughly US$9.4 billion worth of its US dollar reserves directly, as well as trying to utilise said reserves through forward contracts rather than selling its dollars outright.
This, however, has its limits. By the end of 2024, Vietnam’s foreign currency reserves had been reduced to just US$80 billion. With the International Monetary Fund recommending a foreign currency reserve equal to three months worth of imports, about US$95.2 billion on a 12 month average of Vietnam’s 2024 imports, this has put the country in a precarious position.
As such, the SBV looks to have abandoned using its foreign currency reserves for now and is instead allowing the dong to depreciate.
So, who loses when the dong depreciates?
Firstly, it’s not exactly clear why Vietnam works so hard to protect the dong (likely past bad experiences with high inflation), though there are a few clear downsides of allowing the local currency to depreciate.
For one, a weaker dong means imports become more expensive.
Coal, for example, is a key component of Vietnam’s energy mix and Vietnam imports a lot of it. Last year, this was roughly 63.8 million tons, worth US$7.6 billion. This would have been worth VND 193.6 trillion as of January 1 this year, however, at today’s exchange rate that same US$7.6 billion worth of coal would cost an extra VND 40 billion.
With coal and imported fuel sources more broadly (crude oil, petrol, gas, etcetera) being key pillars of Vietnam’s economy, this means all things being equal (which they often are not in Vietnam), energy costs should rise leading to higher production costs and subsequently higher prices for consumers.
Moreover, a weaker dong makes servicing US dollar denominated debts more expensive.
The Government of Vietnam owes about 12.1 percent of Vietnam’s gross domestic product in foreign currencies. Likewise, a number of big firms have outstanding US dollar debts. Novaland, for example, has US$300 million worth of bonds on the Singapore Stock Exchange and VinGroup had about US$2.2 billion in US dollar denominated loans in its 2024 fourth quarter consolidated financial statement.
Furthermore, aircraft leases are almost always denominated in US dollars with Vietjet and Vietnam Airlines holding US$141 million and US$274.5 million of long-term lease finance at the end of last year, respectively.
That said, all of these organisations should have hedges against currency fluctuations (though it’s not clear that many of them do or that if they do they are sufficient).
Who stands to benefit?
Whereas a weaker dong is not good for importers or the holders of foreign currency denominated debts, there are undoubtedly a few winners.
Exporting firms that pay their expenses in dong but collect income in dollars will see their profit margins expand. Likewise, foreign customers will be able to buy more for less. This should see a spike in demand for Vietnam’s exports which could see more jobs created for Vietnam’s working class.
On that note, as prices for imported goods rise, local products and produce will become more competitive driving an increase in consumption of locally made goods.
Moreover, as a tourist destination, Vietnam on the whole will become cheaper to visit and this could lead to a spike in foreign tourists. This will also make holidaying abroad for Vietnamese more expensive, encouraging Vietnamese to instead holiday at home.
Furthermore, remittances from abroad will also be worth more making working abroad more attractive. This could lead to a jump in Vietnamese headed overseas to work and by extension a increase in remittances. It’s also worth noting that these roles generally attract young people from low-income communities, which means more remittances going to more people who are more likely to spend those remittances at local businesses on locally produced goods.
The point here is that this could be a boon for consumer spending and, depending on how low it goes and for how long it stays there, a significant step on the path toward a transition from export-led to consumption-led economic growth.
How are these outcomes connected?
All of that said, it’s been clear that the dong has been overvalued for a while–the SBV wouldn’t need to intervene if it wasn’t. It’s also been clear that the measures it was using to prop up the dong had their limits and could not support the local currency forever.
With this in mind, it would make sense for foreign firms and traders to repatriate their profits sooner rather than later. This partly explains the US$4.2 billion withdrawn from the Ho Chi Minh City Stock Exchange by foreign traders since the start of last year. Likewise, for overseas Vietnamese workers it would make sense to hold on to foreign currency as long as possible. That being the case, this would put further downward pressure on the dong.
On the flip side, however, as the local currency approaches a more realistic valuation, foreign traders could start to return to the local stock market and overseas workers might start to remit some of the earnings they have been holding on to.
In this context, not only do local businesses and exporters stand to benefit, but this may also strengthen the local currency over the long run, offsetting some of the aforementioned downsides .
That is to say, whichever way the dong goes there will always be both winners and losers and, in this context, this latest bout of depreciation could actually be a good thing.