beyondbrics

Vietnam, like some other frontier markets, seemed to be remarkably unaffected by the deepening economic problems in the US and Europe over recent weeks.

But the latest waves from the global crisis have finally washed up on Vietnam’s shores after the surge in world gold prices, driven by growing risk aversion, led to a record surge in the domestic gold price, once more putting downward pressure on the country’s fragile currency, the dong.

The gold price has jumped by more than 10 percent since last week, moving from a discount to a premium to global prices and hitting a new domestic record. This afternoon, gold was changing hands for around 45m Vietnam dong ($2,183) per tael, equivalent to 37.5 grammes or 1.21 troy ounces, according to Saigon Jewellery Company, one major trading house.

The central bank, the State Bank of Vietnam, which controls gold imports and the exchange rate, blamed the global price jump and “speculators” who were taking advantage of the onshore shortage of the precious metal following the export of large amounts of gold jewellery in recent months.

The central bank said today it would allow five tons of gold to be imported to “stabilise” the market.

At a time when the government is still finalising new restrictions on the gold trade, which has flourished amid the economic instability of the last few years, the central bank warned consumers that purchasing gold was a “risky” practice.

The sharp rise in the gold price forced up the black market price of dollars, which are used to price gold.

As the central bank sets the official exchange rate for the dong (currently at 20,608 to one dollar), the real measure of sentiment is the widely-used black market.

Despite annual inflation accelerating to 22 percent in July, the dong had been surprisingly stable in the black market since February, when the government devalued the currency by around 9 percent.

But the dong has fallen by around 2 percent since last week, with gold shops selling dollars at 21,000 this morning, amid busier than normal trade.

The volatility of the last few days may prove to be short-lived. However, bankers expect downward pressure on the dong to increase in the coming months as short-term greenback loans, that were taken out to capitalise on the spread between dollar borrowing rates of around 6 percent per annum and dong deposit interest rates of up to 18 percent, fall due for repayment.

Other pressures on the dong could come from the usual year-end dollar squeeze as importers re-stock ahead of the Lunar New Year holiday, the fact that the central bank has taken more than $4bn out of the system to replenish its depleted reserves and the risk that the global crisis hits foreign direct investment and remittances, two major sources of hard currency.

In its latest investor update, Dragon Capital, one of the handful of foreign fund managers in Vietnam, argued that the country’s “non-correlation to the world implosion” could be sustained “if inflation peaks, and gold does not go too crazy.”

With gold prices moving sharply by the hour in Hanoi’s gold shops, there is little to comfort investors right now.

Related reading:
Vietnamese traders beat export bullion ban, FT
Crackdown fears chill Vietnam’s dollar black market, FT
Vietnam: Less gold for Switzerland, beyondbrics