Abstract

The economy of Vietnam, that witnessed marvelous growth from 2000–2007, started slowing down by 2008. The global financial crisis of late 2008 further worsened matters for the already deteriorating Vietnamese economy. The two major macroeconomic problems of trade deficit and inflation put Vietnam in a very critical position. In order to reduce the trade deficit and address the problem of inflation, Vietnam resorted to devaluation of its currency – the dong. The State Bank of Vietnam (SBV) undertook a series of devaluations since 2008, with the aim of increasing Vietnam’s exports and reducing the trade deficit. Interest rates were raised to combat inflation and to make holding the dong more attractive, as the Vietnamese people started to lose confidence in the dong and started hoarding dollars and gold. Vietnam’s decision to devalue its currency raised several questions of macroeconomic importance such as, is the dong devaluation the answer to Vietnam’s macroeconomic problems of trade deficit and inflation? What other policies should Vietnam adopt to stabilize its economy? And would Vietnam’s devaluation result in competitive devaluations by the neighboring countries and thereby start a trade war?

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• To have an overview of the historical context of devaluations – the causes, the responses, and the fallouts and also to generate a debate on the desirability and implications of having either a weak currency or a strong currency
• To analyze the reasons for Vietnam’s currency devaluation and to make an assessment of the likely impact of devaluation on various other macroeconomic variables – Exchange rates, inflation, interest rates, employment, and international trade
• To debate whether devaluing the dong will ease Vietnam’s macroeconomic problems and understand the importance of other policies like monetary and fiscal policies in stabilizing an economy
• To understand the impact of Vietnam’s devaluation on the neighbouring countries and/or trading partners and to discuss and debate whether a country’s devaluation will trigger a competitive devaluation forcing the neighbouring countries/trading partners a

Keywords

Currency Devaluation, Vietnamese Currency Devaluation, Vietnamese Economy, Exchange Rate Mechanism, Currency Crisis, Exchange Rate Management, Import Export Mechanism, Dong Devaluation, Trade Balance, Inflation and Currency Valuation, Trade Deficit and Currency Valuation, Macro Economic Management, Interest Rates and Exchange Rates