Vietnam: A currency manipulator?
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GOODS TRADE SURPLUS WITH THE US, 2018 FIGURES. SOURCE: US CENSUS, BY WAY OF BLOOMBERG
News is out that the US Treasury might add Vietnam to its watchlist of currency manipulators, or even go all the way and just name them a currency manipulator. They have not been on this watchlist before.
The three things that the US Treasury looks for are:
Significant bilateral trade surplus at least USD20bn. Vietnam has had this since 2014.
Lots of foreign exchange intervention. This means buying foreign exchange and selling VND, which helps drive down the price (basic supply and demand - the more of a thing, the less it costs. It works for money too).
A current account surplus of 2% of GDP (this was previously 3%). Since 2008 there has been a massive reversal. Back then, the country had an extremely high current acount deficit (-10.9% of GDP), but it trended up until 2014 and it has stayed high. It was 3% of GDP in 2018.
CURRENT ACCOUNT SURPLUS SOURCE: WORLD BANK
Vietnam meets all these criteria right now.
We have talked about the current account surplus a bit previously. Remember that a current account surplus has to be matched by a capital account deficit - the balance of payments must balance. Meaning that a country that is exporting more than they are importing must also be attracting lots of capital. This capital may be invested in things that are then exported.
In some ways, branding Vietnam as a currency manipulator may be working. The currency has depreciated this year, and it seems to have accelerated in May and is now down 1% YTD (see the orange in the chart to the left). In 2018, the depreciation was about 1.5%, so it has already been matched.
SOURCE: STATE BANK OF VIETNAM
What does it mean if Vietnam is considered a currency manipulator? Well, first the law requires the US government to negotiate with the offending government for a year before retaliating. But even if it gets beyond that step, the retaliatory actions are actually quite small. The administration could suspend OPIC (the Overseas Private Investment Corporation) from working in Vietnam, but there are currently only 2 projects in Vietnam with a total value of just $5.6 million.
Of course, Treasury could always put tariffs on Vietnamese goods, just like the administration is doing with China. That would be very severe. But that’s unlikely: India and South Korea are on the wach list right now (so they have not been formally declared as currency manipulators), and they haven’t really suffered much.
My view is that Vietnam has liked the fact that its relationship with the US has improved (see the US-NK summit in Hanoi) and that the US’s trade relationship with China has worsened. The latter has led to increased foreign investment in Vietnam as a manufacturing alternative to China. Because of all of this, the government will likely make some concessions on the exchange rate (even if it hurts their exports). Currently it seems like analysts are looking for just 2% depreciation. I would expect it the State Bank of Vietnam to maybe allow a bit more floating than this, say 3-5%. This would help placate the US. Plus, exports are trending up, so the impact of a more expensive currency may be quite minimal. Let’s see what happens.