Currency manipulation

I don’t really want to talk about trade every day, but I feel I have to write something about this report from the US Treasury on currency manipulation for a few reasons:

First, it’s good news for Vietnam. The country is still in the report, but it only meets one of three criteria for currency manipulation (this is down from the May 2019 report). Progress!

Second, it is still in the report because: “By rule, the Treasury retains countries on the monitoring list for at least two consecutive reports when they are first cited, hence it kept Singapore, Malaysia and Vietnam on the list.”

Source: US Treasury report on currency manipulation

Third, I wrote about the risks to Vietnam (here) back in May when the first report mentioning Vietnam came out. I feel I should follow up, for you, my dear readers.

As a reminder, the US Treasury looks at three criteria to determine currency manipulation: 1) a large trade surplus, 2) a large current account surplus, and 3) heavy one-sided foreign exchange intervention. More about these three criteria and Vietnam:

1) Vietnam’s trade surplus actually grew over the period. In 2018, the surplus was $40bn, and in the four quarters ending in 2Q2019, it rose to $47bn. This is likely to get worse, given the growth in its trade surplus.

2) The current account balance in the period fell to 1.7% GDP, down from 5.4%. My concern is that it will likely go up again in the next report. Well, we know it will, if the Ministry’s figures are correct (as we talked about yesterday). It will likely be around 4% of GDP, which is considered “material” (anything over 2% is).

3) Vietnam is intervening in the foreign exchange market, but less than previously. It’s net purchases were only about $2bn, or less than 1% of GDP, down from $4bn (1.7%) in the last report. It also hasn’t been consistent, which is defined as intervention in 6 of the last 12 months.

But the currency is undervalued by most estimates:

“The most recent IMF assessment indicated that the dong was 8.4 percent undervalued on a real effective basis as of 2018.”

See the chart below that looks at undervaluation of exchange rates for the US’s major partners. In fact, it is second to only Thailand in being undervalued, according to the IMF. This means that it is cheaper to export and more expensive to import than what would be the case.

The Vietnamese government is intervening (meaning buying USD and selling VND, which pushes down the currency). It has a floating exchange rate with the US dollar, but it only floats in a small band (+/-3%). But not all the intervention is to keep the currency undervalued. Some of it actually makes sense, given that Vietnam has inadequate reserves.

“The IMF continues to assess that Vietnam’s reserves remain below adequate levels, standing at 76 percent of the IMF’s reserve adequacy metric (for fixed exchange rate regimes) as of end-2018.”

While Vietnam doesn’t meet two of the the technical criteria, it also benefits from the US Treasury understanding of some of its intervention.

Vietnam has a reprieve for the moment, but in the next report (Treasury has 6 months), it will likely back to hitting 2 of the 3 criteria. I assume that the government will make sure not to hit the third one, which is the one most easily under its control.

hSource: IMF by way of US Treasury Report on Currency Manipulation