By JC Collins
The currency of Vietnam is called the dong and has
been pegged to the US dollar for a very long time. The dong has been
devalued consistently over the last 4 decades to facilitate the exportation of
dollar inflation. Within the country the dollar is predominately used and
loans by local financial institutions are predominately denominated in
dollars. But all of this is about to change.
The Vietnam Business Forum has been working on methods
of stabilizing the Vietnamese dong and its Macroeconomic Policy Working Group
(MAG) has just released its recommendations and they are dramatic to say the
least.
As reported by Vietnamese
Dong News, the following quotes are taken
from the substance of the MAG report.
“Yuan, the currency of China, the second largest
economy in the world, and Vietnam’s biggest trade partner, has never gotten a
foothold on the foreign exchange market in Vietnam.”
The implication from the report is why would Vietnam
continue to use and peg the dong to the US dollar, who it does only marginal
trade with, when in reality China is Vietnam’s largest trading partner.
“Experts: heavy dependence on US dollar not good
for Vietnam.”
Extremely self-explanatory.
“The report released by MAG last week pointed out
that Vietnam’s dollar-pegged foreign exchange policy has had a negative impact
on its trade balance.”
This is obvious and timely. We covered the
reasons for this in the post “Why the
Vietnamese Dong will Reset”.
“In terms of Vietnam’s sovereign debts, its biggest
creditors in 2012 included Japan (34.5 percent of Vietnam’s total foreign
debts), the World Bank (28.8 percent), and ADB (15.5 percent). As such,
Vietnam’s foreign debts have been valuated not only in the US dollar, but also
in other hard foreign currencies, including JPY, SDR and EUR.”
Of course the SDR is the mechanism by which most
sovereign debts will be restructured. Debt will be consolidated and
packaged as SDR bonds.
“MAG’s experts commented that it is unreasonable
for Vietnam to follow a dollar-pegged foreign exchange policy, while its trade
and foreign debts depend on other foreign currencies.”
With China being Vietnam’s largest trading partner we
can assume which currency is being referred to here.
“Therefore, Vietnam has been recommended to apply a
new foreign exchange policy which allows it to valuate the Vietnam dong in
correlation with more than one foreign currency. This will be a reasonable
choice which helps both stabilize the exchange rates and ensure the flexibility
of the nation’s policies.”
The operative phrase in the quote is “a new foreign
exchange policy”. As stated, it is likely that the dong will be pegged to
a basket of currencies. Which baskets now exist outside of the Euro and
the SDR? None. But with the announcement of the BRICS Currency
Market Stabilization Fund this week and its $100 Billion injection from the
BRICS countries, it is possible and probable that the BRICS currencies will
form a stabilization basket from which other currencies, like the ones
belonging to the Next Eleven countries, of which Vietnam is a member, can peg too and
stabilize.
“Now is the right time for Vietnam to follow the
new policy, as it now has all the necessary conditions to do this. Vietnam has
wide economic openness, but it <does | should>not depend on any one trade
partner.”
The right time is strongly implying imminence.
The BRICS Development Bank and the currency market stabilization fund are vital
components of the policy being described by MAG.
“Therefore, if it were to apply the policy, Vietnam
would be safe from the shocks in other foreign currency markets, if and when
they occur.”
This statement is suggesting sudden and dramatic
adjustments to the foreign currency markets, which is likely focused on the US
dollar and the coming changes to its status as the world’s primary reserve
currency.
At this point I would recommend readers to revisit the
following posts:
And the whole SDR’s and the
New Bretton Woods series,
especially Part Three, sub-titled The Real Global Currency Reset.
It is almost surreal that what we have been describing
from the beginning is now taking place. The world is on the verge of huge
and dramatic changes.
The BRICS currency basket will eventually be
integrated into the larger macro SDR basket, most likely at the end of the year
when the 2010 Code of Reforms are finally passed and the Executive Board of the
International Monetary Fund is restructured. This fits perfectly with
what we have described as the local currencies of countries consolidate into
regional currency groups which will then make up the SDR supra-sovereign
basket. See the post “The Arcane SDR
Supra-Macro Asset”.
The US dollar continues to be isolated around the
world and the critical stage of actualization for major adjustments to the
currency markets has arrived.
And for those who continue to propose that the BRICS
Development Bank will compete directly with the World Bank and IMF, you will be
severely disappointed when these organizations begin to announce macro
financial agreements. I’ve already discussed how the World Bank has
expressed its full support for the BRICS Development Bank in the post The Emerging
Multilateral.
The World Bank is also openly supporting
Vietnam’s policy group and mandates, as described here. Be sure to read the full article as the World Bank
describes how China’s oil rig being placed in Vietnam’s Economic Zone has
had no negative effects.
Additionally, the World Bank’s President will be
visiting Vietnam on July
16th and 17th to strengthen the
partnership. These are the same dates as the BRICS summit from which the
official announcements of the New Development Bank and Currency Stabilization
Fund will be made.
And as we’ve explained already, the World Bank has
offered its full support for the BRICS Bank. This is not a coincidence
and is making it increasingly challenging for those who attempt to convince us
that their are two opposing sides to the economic reset taking place.
Its obvious that the Vietnamese dong is about to be
revalued but how that revaluation will look on the other side is not clearly
determined. Those who have dreams of getting rich from the dong
reset may in fact see some sort of upside but it is just as likely that capital
flow restrictions could very well hamper some of this.
Much is known, as can be attested from the above
information, but there still remains large components of this financial
reset which have been well hidden. But let us not forget those
around the world who have suffered tremendously under the past imbalances,
none more so than the Vietnamese people themselves, who have shown strength and
perseverance through decades of war and economic sanctions. The fact that
they have modernized faster than any other country in the world is a
testament to the power of the human heart and mind. – JC
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