Devaluation nations: Vietnam plays catch up

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Vietnam's latest devaluation of the dong isn't a new shot fired in an Asian currency war, just the country catching up with regional peers that have already seen their currencies plunge, analysts say.

The State Bank of Vietnam (SBV) devalued the dong (VND) by 1 percent against the dollar on Wednesday—its third adjustment so far this year—and simultaneously widened the trading band to 3 percent from 2 percent previously, the second increase in six days.

"The prima facie evidence sensationalist headlines about Vietnam upping the ante on currency wars may be tempting, but we politely refute such allegations," Vishnu Varathan, senior economist at Mizuho Bank, said in a Wednesday note.

Indeed, Vietnam's aggressive move has been widely interpreted as a blatant attempt to keep its exports competitive in the wake of China's historic 2 percent currency devaluation last week.

Beijing is Ho Chi Minh's largest trading partner, with Vietnamese exports to China rising 3.6 percent on year to $7.7 billion in the first half of 2015. Both countries are low-cost manufacturing hubs and compete for investment from foreign companies, so a weaker yuan makes Vietnamese goods more expensive in comparison.

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"Admittedly, this [dong devalulation] is a significant deviation from perceived FX policy guideline. But the reality is that the SBV is merely beginning to align with brutal Asia-ex Japan (AXJ) shifts," Varathan added.

The dong has depreciated nearly 5 percent so far this year, but Varathan notes it still hasn't closed the gap with most other ASEAN currencies. In comparison, Thailand's baht has dropped 8 percent, the Indonesian rupiah has lost 12 percent and Malaysia's ringgit is 17 percent lower.

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"The dong has been one of the more resilient currencies amidst the emerging market Asia downdraft of recent months. Re-alignment of the currency therefore seems warranted from a macro-balance perspective," echoed economists at Australia New Zealand Banking (ANZ) in a note on Wednesday.

"Vietnam is not actively participating in a currency war or a race-to-the-bottom as some headlines may suggest."

It's the economy, stupid

Falling exports and the consequent threat of current account pressures also warrant a softer dong, economists argue.

Vietnam's current account shows a surplus but the first half of 2015 saw imports exceed exports for the first time in three years, leading to expectations for a current account deterioration.

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"The trade balance is projected to narrow significantly in 2015 due to softer export growth and sustained strong import growth stoked by stronger domestic economic activity," the World Bank noted in a July report.

But adjustments to the exchange rate such as Wednesday's move will help cushion the blow from current account deterioration, ANZ said, which is helpful for investor sentiment ahead of a widely anticipated U.S. interest rate hike later this year.

A lower dong also makes the country more attractive to incoming tourists. The country's tourism sector is struggling, with tourist visits in the first six months of the year down an annual 11 percent, according to the World Bank.

Further currency weakness is widely expected, with Mizuho Bank setting a target of 23,000 VND per dollar by early 2016, compared to Wednesday's close of 22,364.