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DESPITE RISE IN FOREIGN DIRECT INVESTMENT, VIETNAM AND PHILIPPINES CONTINUE TO STRUGGLE WITH MAINTAINING SUSTAINABLE GROWTH


March 25, 2008 Source:  www.AsiaEcon.org In addition to limiting the commercial banks deposit rates, Vietnam has recently abandoned its de facto dollar peg in a continued effort to curb the countries rampant inflation rates which have reached the highest levels since 1995.


March 25, 2008

Source: www.AsiaEcon.org

In addition to limiting the commercial banks deposit rates, Vietnam has recently abandoned its de facto dollar peg in a continued effort to curb the countries rampant inflation rates which have reached the highest levels since 1995. By pegging the dong to the dollar, Vietnam’s central bank has lost some domestic monetary control. Before the recent push to increase the band, the percentage to which the Vietnam dong rose and fell against the dollar was 0.75 percent. After March 10th the band was widened to fluctuate to 1 percent and the central bank plans to expand this band to 2 percent. Since this band was widened, the central exchange has changed from 16,030 dong to 15,980. Although the central bank stands at 15,980, the central bank has allowed a private bank to conduct an exchange on a trial basis. Eximbank has offered to buy the dong at a 15,680, a full 1.91 percent lower the central bank’s official rate, which illustrates the dong being undervalued.

The financial situation in Vietnam is vastly different from the United States. The United States is currently attempting to jump-start a slowing economy, while Vietnam is attempting to stave off inflation in an economy that has grown by an average of 7.5 percent a year since 2000. Banks in Vietnam are currently reluctant to exchange dollars for dongs due the dollars recent poor performance in the global market. As a consequence, exporters and individuals that have been used to using the dollar for daily business are being adversely affected. These parties are trying to exchange their dollars for dongs, while the dong continues to appreciate in value.  As a result of previous actions, the dong supply has been curbed in previous attempts to help the inflation problem. Although the central bank has widened the band on the peg, prior efforts to curb the inflation problem have depleted dong reserves and have caused more demand for the currency itself. Even though customs cleared U.S. dollar-denominated exports rose 18.6 percent in the January-October period of 2007, the recent move by the central bank to widen the band has hurt the exporters. As the dollar drops, the exporters are forced to pour in larger amounts of dollars to keep business going. A possible solution would be for commercial banks to micro-finance the export industry so that international fluctuation won’t negatively affect one of the largest sources of income for Vietnam. Foreign direct investment in Vietnam and the Philippines have been a major source of growth for both countries, however the Philippines FDI has not been fully utilized and the FDI has not trickled down to consumers.

According to the Bangko Sentral ng Pilipinas, the amount of foreign direct investment is expected to rise from USD 2.93 billion to USD 4.2 billion by the end of the year. The majority of the growth is being attributed to the mining sector, where firms are continuing to invest in projects that were started in 2007. The demand for raw materials continues to rise, due largely to the pent-up demand from emerging markets like China and India.  In spite of the greater investor sentiment in the Philippines, consumer spending has slowed and unemployment has risen from 6.3 percent in October to 7.4 percent in January. This unemployment jump occurred despite the record growth in the 4th quarter and demonstrates future problems for the Philippines. This problem is illustrated by the lack of employment generation, which severely declined when only 150,000 jobs were created, well below the 1.4-1.6 million target, for this time.  Due to the dollars recent decline and the peso’s appreciation, remittances which constitute 70 percent of the Philippines GDP, will de-value and harm the purchasing power of most consumers. Underpinning this blow to consumers, the rising fuel costs will adversely affect consumer’s pocket books and drive down consumer demand. The Philippines can decrease their reliance on overseas remittances if foreign direct investment is driven into employment generating opportunities that could fuel domestic demand in the Philippines.

Source: www.AsiaEcon.org

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Source: www.asiaecon.org |


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