More on dollar strengthening

Sorry for not writing last Friday. My car was hit by a drunk driver (luckily I wasn’t in it), and it totally ruined my day. And ruined the car. All I can say is that: Thank goodness no one was hurt.

I wanted to follow up on my post from last Thursday about dollar strengthening. This is still an issue around the world - the dollar hasn’t strengthened much over the past few days, but it continues to be very strong and there has been no reversal.

The US Fed has been aggressive and has extended swaps to other central banks, which are using them. This is the same play book that we saw in the last financial crisis. Adam Tooze, which wrote a good book about the financial crisis called Crashed, has a post on this. (Long-time readers may remember his name from this post, where I wrote about the book and the difficulties of dollar-denomination of the world.)

In his post, Tooze talks about how the swaps are being used. He fears that it will not be enough, given “comprehensive and violent capital flight.” In Southeast Asia, Malaysia and Thailand have suffered. The MYR is down about 3% in the past 5 days and 6% since the beginning of the year. Thailand is down 2% in the past 5 days, but 8% since the beginning of the year.

Vietnam hasn’t seen currency pressure (or at least the currency hasn’t changed, even if there is pressure). But we don’t have daily reserve figures (or at least I don’t) to see how the SBV is dealing with all of this.

Vietnam has done a pretty good job of de-dollarizing the economy. Here is an article about how the SBV has implemented new measures to reduce dollarization. The first was in April last year, when it stopped short-term loans for importing goods for domestic demand. The second was:

“Most recently, Circular No.42/2018/TT-NHNN dated October 1 revealed that the SBV would prohibit foreign currency loans to importers in both the mid- and long-term. This decision applies for domestic and international lenders. The SBV aims to reduce the proportion of foreign currency in total outstanding debts below 7.5 per cent next year, and below 5 per cent in 2030.”

Ultimately, if something like 8-10% of total outstanding debt was in foreign current previously, that would mean something like $45bn at the high end. I assume this is only private, with the remainder public That seems about in the right area (although I would love to just see the number, and but it is very hard for me to find - I assume I just don’t know where to look). Lots of this is long term, as can be seen in the external debt figures.

2018 figures. This includes public and publicly-guaranteed external debt. Source: World Bank

External debt in total was $109bn in 2018 (the last data available). Short term was $20bn, and long terms was $88bn. Of the long term, $53bn was public or public-guarantees. Short term decreased from 2017 to 2018, but it was way up in 2017.

Surprisingly, while the portion that was in USD is high (57%), a good portion was in JPY (27%), with a small bit in SDR (8%) and 4% in Euros. (See chart to the right - this is just the public and publicly-guaranteed debt.)

And remember that Vietnam has reserves of close to $80bn, or did as of December. So it seems like it should be fine, especially with the current account surplus (at least through the first two months of the year).

Ultimately, Vietnam probably does need to continue to decrease dollar-funding in the economy, in order to decrease risk to the currency and the underlying indebted companies in Vietnam. Basically, to reduce the risk of default by the sovereign or companies due solely to changes in the currency. The SBV is well-placed now for the current crisis, but it might not last if the pandemic (and the response to the pandemic) continues for a long time, hurts trade (resulting in a deficit) and hurts companies (making it difficult for them to pay back loans).