Vietnam's Currency Problems underline Political Strength of Dollar

The Dollar is being relentlessly attacked by Bears due to massive QE program unleashed by the US Fed.However the US Dollar continues to be a safe refuge in many parts of the world.For countries affected by major political and economic problems,dollar is looked upon a safe haven for capital preservation.Many of these places have a history of high inflation and major political upheavals.In these places,Gold and Dollar are looked upon as equals for preserving wealth during times of chaos.

Vietnam serves as a reminder where even citizens of relatively fast growing stable economies look upon as  Dollar as a rock of stability.The South East Asian country has seen high inflation in recent times and numerous devaluations of its currency.The Communist led country has tried to replicate China in many of its policies some of which have backfired.The recent scandal and debt default of a major government owned company has shaken the confidence of investors.With high inflation and depleting foreign reserves,Vietnamese are converting their currency into gold and dollars as black market rates are much lower than official rates.The Vietnam example shows that the strength of the dollar is not only based on its economic  strength but also because of its political and military strength of the USA.While dollar bears keep talking about replacing the USD,there is a hardly any country or grouping which comes close to the USA in terms of stability.Does not seem like  EU,China or Japan will come to replace the USD anytime soon.

Vietnamese seek safety in gold as currency wobbles

Do Hai Ninh has been stashing away her meager earnings until finally saving enough to make a deposit. But the high school teacher isn’t about to put her money into a Vietnamese bank with the value of the local currency steadily dropping. She’s investing in a safer bet: gold.

Jewelry shops and black-market money changers have overflowed with customers in recent weeks, desperate to unload their Vietnamese dong for greenbacks or gold nuggets as the fast-growing Southeast Asian nation is buffeted by double-digit inflation and the near collapse of one of its largest state-owned companies.

The problems have underlined the downsides of the Communist government’s push for rapid economic growth, which has lifted millions out of poverty but created new challenges that the country’s technocrats are often ill-equipped to deal with.

Attempts to create national corporate champions have wasted capital with unwise investments and left state-owned businesses loaded with too much debt. Rapid growth in lending, meanwhile, has not been matched by increases in deposits, a phenomenon partly explained by suspicion of banks after previous bouts of hyper inflation destroyed savings.

It all adds up to a financial system creaking under immense pressures that are reflected in the lack of faith Vietnamese have in their country’s currency.

Last week, Moody’s Investor Services slashed Vietnam’s government foreign currency bond rating to B1 from Ba3 and kept the outlook as negative, meaning it could cut the credit rating again.

It said the country was facing an increased risk of a balance of payments crisis because Vietnam is importing more than it exports, foreign exchange reserves are being depleted to prop up an overvalued currency and foreign capital is fleeing. High inflation, excessive bank lending and problems at Vietnam’s beleaguered state-run shipbuilding conglomerate Vinashin were further reasons for the downgrade, Moody’s said.

The head of Vinashin repeated Monday that the shipbuilder did not have enough cash to make the first repayment of principal due that same day on a $600 million loan from a group of creditors led by Credit Suisse. He told the official Vietnam News Agency that the company was still awaiting word from the lenders on whether they will agree to delay the payment.

The government has said it will not bail out the company, also known as Vietnam Shipbuilding Industry Group, which owed $4.5 billion (86 trillion dong) in debts as of June. That’s equal to 4.5 percent of the country’s gross domestic product last year. Vinashin has asked creditors for extra time to make good on its payments after the company’s restructuring.

Prime Minister Nguyen Tan Dung last month assumed responsibility for the floundering company, blaming its problems on corporate malfeasance and unchecked rapid expansion into numerous areas outside shipbuilding from animal feed to tourist resorts.

Ratings agency Standard & Poor’s issued a statement last week saying the company’s woes would likely result in higher bad debts at the country’s banks.

“Currently, the government has asked local banks not to collect debts and interest on Vinashin,” said senior Vietnamese economist Le Dang Doanh. “I’m sure the government will have to subsidize the interest for the banks because the banks cannot afford not to collect interest while they have to mobilize savings with increasingly high rates.”

The local currency plunged to an all-time low earlier this month on the black market, hitting 21,600 to one U.S. dollar in the commercial capital Ho Chi Minh City and 21,500 in Hanoi. It was trading at 21,140 in Hanoi gold shops on Tuesday. The official rate was 19,500.

The State Bank has devalued the official dong rate three times since Nov. 2009, reducing its value about 10 percent against the dollar over that time, but it is still widely regarded as overvalued.

“You can see that the dong is losing its value. Everyday, you go to the market and everything is getting more expensive,” she said while exchanging 7.2 million dong ($360) for about 7.5 grams of gold at a bustling gold shop in Hanoi. “It’s a safer place for my savings.”