Like the US, Vietnam has a government stimulus package — about a billion dollars, or roughly 1.1% of GDP. Also like the US, Vietnam has been running a government budget deficit and a big current-accounts and trade deficit for the past few years. So it’s already heavily in debt. But that’s where the similarities end: when it comes to financing that government stimulus package, the US has it easy, while Vietnam is in trouble. The “flight to quality” prompted by the GFC has led everyone in the world to start eagerly buying US bonds, meaning the US can borrow money for its $800 billion stimulus package essentially free — the interest rate on US bonds is gliding down towards zero.
Vietnam, however, like other emerging markets, is sitting on the other side of that bargain: when investors flee to the safety of US bonds, what they’re fleeing from is the risk of emerging-market bonds like Vietnam’s. On Thursday, the Vietnamese Treasury tried to sell 1 trillion dong ($57.2 million) worth of 2- and 3-year bonds at annual yields of 7.2% and 7.3%. There were no takers; buyers wanted at least 8.5% a year.
One reason for the caution is that Vietnam is likely to devalue the dong against the dollar this year by something like 6% in order to defend its exports, in part because the global demand for US bonds is driving the dollar up and if Vietnam were to try to keep parity with the dollar, its exports would suffer relative to those of competitors. But devaluing the dong is no panacea either: a lot of Vietnam’s exports are assembled from imported materials that have to be purchased in foreign currency, so when the dong falls, the trade deficit may rise. In any case, the point is that while the US would like other countries to help stimulate the global economy, for many emerging markets that’s very difficult. The very economic anxiety they’re trying to fight makes it expensive for them to do the borrowing they’d need to stimulate their economies.
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