Vietnamese shares fell 10% on the MSCI frontier index through August as the central bank changed course and again devalued the dong in light of China’s sudden 2% move, with the dollar peg 5.5% weaker so far this year. After two previous alterations, officials had promised exchange rate stability but Beijing forced their hand in view of a large bilateral trade deficit, even though exports to China are just one-tenth the total and half the US and EU shares. Annual export growth has also fallen to single digits compared with 15% in 2014, and foreign reserves estimated at $35 billion, or three months imports, have come under pressure before the final round of Trans-Pacific Partnership negotiations and the next 5-year Communist Party Congress early in 2016. The currency depreciation alone is only one-third the drop from competitive rivals Indonesia and Malaysia and will not reverse external trends, and the 6% growth target will remain in danger pending bolder monetary and structural reforms.

The trade deficit into August was $4.5 billion, compared with a $3 billion surplus at the same time last year, with a 15% bank credit increase stoking import demand. Export composition has also become an obstacle as one-quarter is now high-tech electronics subject to the same cycle as Korea and Taiwan.  Low-end garment sales are no longer so dominant with operations relocated to cheaper wage South Asian neighbors. The minor dong adjustment can aid at the margin, but the current account surplus will sink this year to around 4% of GDP, as the capital account figure likewise narrows on reduced foreign direct and portfolio investment. Remittances at over $10 billion remain the balance of payments salvation and were bolstered recently by the 40th anniversary commemoration of wartime victory and tax and ownership incentives to lure the 4-million strong diaspora. Limits on property purchase were eased and majority control will be allowed in non-strategic industries, although details are lacking and further privatization of state enterprises is not an immediate aim. The main deal since the opening was a $100 million retail chain commitment by a US venture firm.

Banking will stay in government hands as loans for real estate, infrastructure and state and private company refinancing resumed their double-digit pace after a deleveraging period. Japanese and Korean banks had extended billions of dollars in cross-border lines, but have turned more cautious with doubts about TPP free trade agreement finalization and commodity direction from natural resource sector clients. Locally declining food and fuel prices cut inflation to negligible levels and even with the consecutive devaluations it should stay below 5%.

Vietnam is the only potential communist signatory to the Trans-Pacific pact, and is also an outlier on corruption where it ranks 120 out of 175 countries on the Transparency International Index. The two-term prime minister, Nguyen Tan Dung, may seek the party’s top general secretary post in a bid to hold on to power and reprise his original economic modernization agenda sidetracked by scandals and bureaucratic inertia. He had to bail out fraud-ridden state shipper Vinashin several years ago, which prompted a sovereign ratings downgrade, and early this year retreated on social security reform needed for system solvency in the face of worker protests. A new generation candidate has yet to emerge to overhaul the rigid political and commercial apparatus in place for decades.

Political and economic succession in the wake of currency adjustment also features in Kazakhstan, where shares were down 40 percent through August, the worst performer on the MSCI Frontier index. President Nazarbayev, in office since independence after another election cakewalk this year, abandoned the tenge corridor with the dollar and euro in favor of an outright floating regime after $10 billion in central bank intervention through the first half. It immediately fell 25% to the greenback as appreciation was halted against the Russian ruble, amid meager 2% growth on flagging oil exports and fiscal stimulus. As in Vietnam the exchange rate shift was notable, but state-owned banking bad assets and industry lack of productivity should also be removed as economic policy pegs.

Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.

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