Burgernomics in Vietnam

According to the latest iteration of The Economist's Big Mac Index, the Vietnamese Currency - the Dong - is 47% undervalued against the US Dollar. Adjusting for differences in GDP/person, the Dong is predicted to still be 10% undervalued.

The big mac?index was invented by?The Economist?in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power-parity (PPP), the notion that eventually, exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries.

Although 'Burgernomics' was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible, the Big Mac index has become a global standard, included in several economic textbooks and the subject of dozens of academic studies.

Over the last 30 years, as Vietnam established itself as a major exporter and a global manufacturing base, its currency has depreciated against the USD by an average of about 2% per annum.

In recent years, however, the Vietnam Dong has been stable, and in 2021 the currency appreciated against the USD. The Economist's illustration of purchasing-power-parity (PPP) using the relative prices of Big Macs in different countries (69,000 Vietnam Dong as of July 2021 in Vietnam, versus USD 5.81 in the USA) suggests the currency has room to strengthen further.

Vietnam has been attracting significant foreign direct investment (FDI) ever since it opened its economy in the 1990s under the Doi Moi policy. The last two years have seen an average of $20 billion per annum in FDI, despite COVID, and in the first month of 2022, the monthly level of investment was up by 4% year on year. FDI, coupled with a trade surplus of $4bn in 2021 and inward remittances from overseas Vietnamese, has boosted the country's foreign reserves to over USD 100 billion.

In the early 2000's you could buy a T-Shirt in Ho Chi Minh City's markets saying, 'I was in Vietnam before McDonald's'. This is no longer the case, as global brands such as the 'Golden Arches', Burger King and Starbucks have found a place alongside local, and much tastier, staples such as Pho, Banh Mi, and iced heart-thumping local dripped Robusta coffee.

The simple fact that Vietnam is even included in the Economist's study, when in fact its currency remains to be freely convertible outside of the country is also a testament to the growth in the importance of this country of 100m people.