Why is Vietnamese Currency Weak?

Vietnam is one of the cheapest countries in the world to live in. Especially when you compare it with the countries in the west and everything that Vietnam has to offer. Even the biggest and the most expensive cities in Vietnam like Hanoi and Ho Chi Minh cost about USD 1300 for a couple. You could survive on USD 500 and USD 3000 is good enough to live a life that is lavish in every sense of the word.

Vietnamese Dong

So what makes life in Vietnam so inexpensive? It is largely due to the fact that the exchange rate on the Vietnamese Dong is the second weakest in the world. Only country that has a weaker exchange rate value than the Vietnamese Dong is the heavily sanctioned Iranian Rial.

Vietnam has one of the highest denominations in terms of currencies, yet is one of the weakest when it comes to value. Why the disparity? Why is the Vietnamese Dong so weak?

Here are a few reasons why the Vietnamese currency is one of the weakest in the world.

Vietnam opened itself up to global markets only in 1986. While this may seem like a good 34 years ago it’s still relatively new to invoke a sense of security and trust from foreign investors. The Vietnamese Dong is still too new and largely irrelevant even in the South East Asian markets at this point. Most investors stick to currencies that have been around for longer, where the currency is backed by a robust, sustainable economy. Very few investors invest in smaller, newer currencies like the Vietnamese Dong.

All the regulations set up by the Government also plays a part in this. More than 50% of the Vietnamese economy falls into the private sector. This has further alienated industries from receiving investments. At the same time, excessive government involvement has discouraged any willing investors from investing in Vietnamese markets.

Government regulations and processes invariably lead to corruption, red tape and bureaucracy in developing markets. Vietnam is unfortunately not different from other developing economies in this case. Rampant corruption has led to a lot of projects being stalled or discontinued, which has further restricted foreign investment in the country. A lot of these abandoned projects would have been integral to Vietnam’s growth, as they would have strengthened the infrastructure of the country as a whole. Projects like improving the road network, expansion of roads and projects that were focused on urban development have all been abandoned. Corruption has played a big part in adversely affecting the Vietnamese Dong.

Large denominations are often a sign of hyperinflation. Vietnam too went through a tumultuous period in the 1980’s, where the economy was at its highest. At one point in 1988, Vietnam was facing a 770% + inflation. The fact that the word thousand is now just considered a unit of currency more than a denomination value is a sign of how Vietnam has normalized its hyperinflation.

One of the simplest reasons that explain why the Vietnamese currency is weak is the denomination of notes that the government keeps printing. The more Vietnamese Dongs the government prints, the more readily available supply there is. However, if this supply exceeds the demand for Vietnamese Dongs, then the value of these Vietnamese Dongs that are available in abundance, is depreciated. This enables the market to decide how many Vietnamese Dongs would be required to buy each USD.

A classic example of this is in 2008, where 1 USD was equal to 15000 Vietnamese Dong. While now in 2020, 1 USD is equal to 23323 VND. A massive rise in supply that has not been matched by a rise in demand.

Having a weaker currency also allows the Vietnamese Government to gain an upper hand with other competitors, when it comes to exports. Currently the Vietnamese Dong with its lower value can export products at a cheaper level than other countries, and thus attract a considerable amount of foreign investment. A lower valued currency also helps in attracting foreign investment, especially from a manufacturing perspective. The shift can be seen with global brands like Samsung and Intel. They have already either partially moved their production line from China to Vietnam, or entirely moved their manufacturing operations to Vietnam.

The other benefit from having a largely depreciated currency is that it discourages imports. Products consumed by Vietnamese locals are far cheaper than their foreign counterparts. This means consumers will always choose domestic products over the international ones, and further strengthen the economy. Vietnam still has to import machinery that they do not have the skillset to manufacture on their own. Unfortunately, this affects their profits from export and manufacturing, and is reflected in their inflation rate. This inflation is the reason why the Vietnamese currency is still weak. Inflation gives the sense that you can buy fewer things now than you could in the past.

Conclusion

These are largely the reasons why the Vietnamese Dong is considered weak and the reason why Vietnam has a high inflation rate of 5% for a developing economy. However, the Vietnamese government is focusing on the long term growth of the economy. They are doing so by focusing on gaining foreign investments via exports, and investment in infrastructure to set up production lines. The Vietnamese currency is weak at this point, but that does not mean the Vietnamese economy is suffering. Even without an exponential growth, the Vietnamese economy is growing steadily.

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