Here’s Why Vietnam Risks Being Labeled a Currency Manipulator

Vietnam may be the latest country to be targeted by the U.S. as a currency manipulator in a twice-yearly Treasury report on foreign currencies expected this month.

The Southeast Asian nation is coming under scrutiny for artificially holding down the value of the dong, people familiar with the matter said.

The U.S. uses three criteria to determine if a country is a currency manipulator: a current-account surplus of more than 3% of gross domestic product; a bilateral goods trade surplus with the U.S. of at least $20 billion; and intervention in the foreign-exchange market that exceeds at least 2% of GDP.

The Treasury reduced the current-account surplus limit to 2% in its latest report, resulting in an expanded number of countries that will make its monitoring list, according to the people, who asked not to be identified because the report isn’t public yet.

Image 1 : Nine countries had goods trade surpluses with the U.S. for 2018

Vietnam and the U.S. have generally friendly relations and strong economic ties, with shared total trade of almost $62 billion last year. While China remains its top trading partner, Vietnam has become a strong political ally of the U.S. in recent years.

Here’s how Vietnam performs on the three criteria used by the U.S. Treasury in its currency manipulation report:

1. Current account surplus

Vietnam’s surplus on its current account -- broadly the difference between exports and imports of goods and services -- was 3% of GDP at the end of last year, the seventh surplus in eight years.

Image 2 : Vietnam's current account has largely hung in surplus territory

That’s largely owing to the nation’s success as an export engine over the past several years, which has cushioned the current account even as a rising middle class supports consumption and imports. Vietnam’s exports are equivalent to more than 100% of GDP, according to World Bank data, making it one of the most trade-dependent nations in the world.

Since a 10% plunge in exports at the start of 2014, Vietnam has had just three different months of year-on-year contraction in shipments. While regional peers continue to struggle amid a global trade slowdown, Vietnam was able to notch a 7.5% exports gain in April from the same time in 2018, the best in five months.

2. Trade surplus with the U.S.

Vietnam’s trade surplus with the U.S. has exceeded $20 billion since 2014, reaching $39.5 billion last year for the highest in records going back to 1990, according to U.S. Census Bureau data.

Image 3 : Vietnam has tallied a surplus with the U.S. above $20B since 2014

U.S. President Donald Trump has regularly used this gauge as a scorecard, previously ripping China, Russia and the European Union for wrongfully tinkering with their currencies that he views putting the U.S. exporters at a disadvantage.

3. Repeated interventions in currency markets

Vietnam’s central bank allows the dong to trade within a band of 3% on either side of a reference rate, which is based on eight currencies and is set every day. Authorities have in the past devalued the currency to support exports and the economy.

Foreign-currency reserves have doubled to $55 billion in the three years through the end of 2018, according to data from the International Monetary Fund. The State Bank of Vietnam, the nation’s central bank, purchased about $8.35 billion of foreign exchange since the beginning of the year to boost reserves to about $69 billion in May, Tin Tuc newspaper reported on Thursday, citing data from the central bank.

Source : Bloomberg

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