Vietnam lurched closer to a currency crisis yesterday as the Government cut the official exchange rate to a record low. UBS analysts said that the country’s economic profile was more extreme than that of Thailand on the eve of the 1997 Asian financial crisis.

As well as severe concerns over prospects for the dong, some observers see signs that Vietnam faces the growing risk of a banking crisis. They say that investors should be aware of a potentially drastic blow to sentiment when views on the entire region are fragile.

Edward Teather, UBS economist, said that if Vietnam were to unravel, investor sentiment and financial markets in Malaysia, Singapore, Thailand, the Philippines and Indonesia could all take a knock.

In what some observers believe is an increasingly desperate attempt to shore up its struggling economy, the Government cut the central trading point for the dong to 16,516 against the US dollar and widened the band within which the currency is allowed to trade.

The dong swiftly plunged to the bottom of that range in trading yesterday. The official rate, already nearly 0.5 per cent below the level that the Government had hoped to maintain this year, is considerably closer to the rate at which dollars are being swapped for dong in Vietnam’s vigorous black market.

Conducted through the nation’s many gold shops, the black market rate casts the dong about 5 per cent lower than the official rate. Singapore-based currency traders said that the black market would probably send the dong far lower over coming days as implications of the exchange rate cut were absorbed. Futures markets are pricing a 30 per cent collapse in the dong over the next 12 months.

Analysts said that the rising risk of a sudden and crippling depreciation comes as the cracks in Vietnam’s vaunted “economic miracle” have grown too large to ignore. Only 18 months since Vietnam entered the World Trade Organisation, inflation is running above 26 per cent and the country is facing a swollen trade deficit that dwarfs those of its SouthEast Asian neighbours.

There have been no requests for emergency loans from the International Monetary Fund, but the Government is adopting measures that reveal a growing shortage of orthodox methods to control the ballooning trade deficit and currency turmoil, including suspending gold imports. The rocketing trade deficit is hugely influenced by the $1.8 billion of gold imported in the first half of this year.

Investors have deserted Vietnamese shares, sending the benchmark index down more than 60 per cent since January and giving it the status of the world’s worst performer in the past year. Soaring commodity inflation, particularly in food and fuel prices, has hit Vietnam many times more fiercely than it has the rest of Asia. Now, Vietnamese lured from villages by the promise of work in booming new factories are finding the pay inadequate and are striking for better salaries.

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