The business council

Vietnam Shocks Could Put Damper On Foreign Investment

By Martin Vaughan, Dow Jones, 8 April 2011



Exchange rate shocks in Vietnam, and the economic imbalances that led to them, could cause U.S. companies to rethink investments there, an official with the U.S.-Asean Business Council said. U.S. firms doing business in Asia are able to manage exchange rate fluctuations that aren't extreme, said Marc Mealy, vice president of the trade group. But a string of devaluations of the Vietnamese dong and the government's tenuous control of inflation may lead firms to think twice, he said. "Because of the challenges Vietnam has had in getting their hands around these issues, it would seem to have an impact when companies assess expanding their business in the Vietnamese market," Mealy told Dow Jones Newswires. He said he didn't know of specific examples of firms putting investments on hold. The interview was on the sidelines of the annual meeting of finance ministers of the Association of Southeast Asian Nations.



Vietnam in February devalued the dong by 8.5% against the U.S. dollar, seeking in part to narrow chronic trade deficits that have depleted its foreign currency reserves. The move was praised by some economists as necessary to correct economic imbalances -- but it risks exacerbating inflation. A sharply weaker dong raises input prices for firms that manufacture in Vietnam. Meanwhile, the country's low foreign currency reserves, which the devaluation attempts to address, could pose a headache for firms to the extent that Vietnam is unable to guarantee import payments. "In some ways, Vietnam is quite an attractive place to do business right now," Mealy said, citing the economy's red-hot growth in recent quarters. "But it isn't Singapore, and it's not Malaysia, countries which have stronger institutions and are in a better position to manage these kinds of externalities."



The business council group promotes expanded U.S. trade and investment with Southeast Asian nations. It counts many of the largest U.S. multinational firms among its members, including Coca-Cola Inc., Chevron and Ford Motor Company. Mealy said a proposal from some Asean countries, discussed in this week's meetings, to pursue linkages among their home stock exchanges could be a boon for U.S. financial services firms. He said Southeast Asia will remain a hot destination for U.S. investment, even as economic growth in the region is projected to cool from the past couple of years. "Even with Asean and Asia cooling down to 7 or 8 percent annual growth, multinational companies will recognize that this is still where the growth is," Mealy said.
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