Vietnam's Dong `Excessively Overvalued,' Goldman Says (Update1)

http://files.myopera.com/ptson/files/GS%2003Jun08.pdf

By Patricia Lui
June 3 (Bloomberg) -- Vietnam may speed up the pace of the
dong's decline because it is ``excessively overvalued'' when
accounting for soaring inflation, according to Goldman Sachs
Group Inc.
Deutsche Bank AG said the currency will weaken as much as
30 percent in the coming months, extending this year's 1.5
percent loss. Consumer prices have risen at the fastest pace in
16 years while the trade deficit has tripled in the four months
through April on surging import costs. Forwards show traders are
betting the currency will slump 26 percent in 12 months.
``They will be in more trouble'' if they don't consider
speeding up the pace of the dong's decline, said Helen Qiao, a
Hong Kong-based economist at Goldman in an interview today. ``We
are thinking that this is the direction policy makers are moving
toward.''
The dong was at 16,255 per dollar as of 12.45 p.m. in
Hanoi, according to data compiled by Bloomberg. Twelve-month
offshore non-deliverable forward contracts show the U.S. dollar
will buy 21,850 dong in a year. Such contracts, settled in
dollars, are used by traders to bet on currencies they can't
freely convert.
``The probability of the central bank being forced into
taking an abrupt and sharp nominal devaluation in the near term
is still low,'' wrote Qiao in a report published today. The dong
will avoid the scale of devaluation like the Thai baht in 1997,
Qiao said, because portfolio inflows and remittances will limit
the increase in the trade deficit.

IMF Program

Deutsche's Singapore-based analyst Hak-Bin Chua disagreed
with Goldman and echoed Morgan Stanley's forecast of an
impending ``currency crisis.''
``An IMF-style program will be needed in coming months,''
Chua wrote in a report dated yesterday. ``This will involve
further monetary tightening, sizeable dong devaluation,
nationalizing insolvent banks and establishing an asset
management entity to carve out bad loans.''
Goldman's Qiao declined to cite a forecast for the
currency's accelerated pace of declines, and said Goldman is
keeping to its forecasts set in May for the dong to trade at
16,220, 16,260 and 16,400 for three, six and 12 months.
``If inflation deteriorates further for a sustained period,
local capital might flee into gold and the dollar, putting the
domestic monetary system under stress,'' she wrote in the note.
The State Bank of Vietnam may rein in inflation by extending
price controls, fiscal measures and tighter controls on credit,
Goldman said