The Vietnamese Dong joins our Big Mac index

February 13, 2014 Leave a comment

The Vietnamese Dong joins our Big Mac index

Feb 10th 2014, 16:55 by R.L.W.

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TRAFFIC was heavier than normal in Ho Chi Minh City on Monday February 10th as McDonald’s opened its first branch in Vietnam. Mostly motorbikes queued in the new “drive-thru”, while hundreds waited under the golden arches and Ronald McDonald posed with customers.

The opening allows us to add the Vietnamese Dong to our Big Mac index, our light-hearted guide to currencies. It is based on the theory of purchasing-power that in the long run exchange ratesshould move to equalise the price of an identical basket of goods and services in two countries. Our basket contains only one good, a Big Mac burger.

Since a Big Mac costs 60,000 Dong, or $2.84 at market-exchange rates, compared with $4.62 in America, our index suggests the Dong is undervalued by 39% against the dollar. The currency, which is loosely pegged to the dollar, has been stable since June when the country’s central bank depreciated it by 1% against the dollar to help improve the balance of payments. Keeping the exchange rate low has helped boost exports. Vietnam’s trade balance turned back into surplus in 2012. Better underlying economic fundamentals should support the currency. Inflation has fallen from nearly 30% in 2008 to 5-6%.

Last year Vietnam’s trade deficit with China, its biggest trading partner, increased by 45%. Our index reckons the Dong is currently 4% overvalued against the Chinese yuan.

For more on the first McDonald‘s in Vietnam see our article here, and for currency comparisons visit our interactive Big Mac index.

 

Filed under Macro Trends

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