Forex policy as fickle as weather

Thursday, May 8, 2008
While the State Bank of Viet Nam (SBV) affirms that the foreign currency market has been stabilized, commercial banks still complain that they cannot buy dollars and the central bank has to put billions of dollars into circulation.

In March 2008, SBV’s forex policy saw a change: it let the VND revaluate against the dollar. As the result, the dollar depreciated sharply at that time, once dropping to VND15,882/US$1.

However, the policy could not last for long time. The dollar value unexpectedly increased sharply, forcing the central bank to pump dollars into circulation to restrain the price increases.

The dollar shortage is now not so serious and obvious on the market, but it has been threatening the commercial banks that are keen on import-export payment services. Those banks complain that they cannot buy enough dollars to sell to clients due to the fixed exchange rates. Importers and commercial banks can pay more to get dollars from dollar holders, but they dare not do that.

The only dollar supply source importers and banks are relying on is the central bank. However, the supplies from the source just come in dribs and drabs.

Businesses and individual dollar holders, who can be the big dollar suppliers to banks, now tend to keep dollars in hands as the tool of saving assets.

Analysts said that people now tend to keep dollars for fear about the trade deficit. According to the Ministry of Planning and Investment, Viet Nam’s trade deficit reached $11bil in the first four months of the year ($18.26bil worth of export turnover and $29.36bil worth of import turnover), or 60.8% of export turnover. The prediction that the US may stop slashing US$ interest rates has also prompted people to keep dollars as the dollar value may increase again.

The trade deficit showed the signs of slight decreases in April 2008, and will decrease further if the Government takes drastic measures to control imports. However, the drastic measures may cause other side effects.

The demand for dollars is increasing also because of the more expensive imports (petrol, steel and fertilizer). It is expected that the trade deficit may hit $20bil or higher, therefore, the dollar shortage always ‘lies in wait’.

Commercial banks have been trying to buy more dollars and attract dollar capital. Many banks have raised the US$ deposit interest rate to over 6% (higher than the ceiling interest rate agreed among banks). However, the dollar capital flowing to banks remains modest.

What will VND/US$ exchange rate be like?

Analysts said that the most important factor that decides the VND/US$ exchange rate is the trade deficit level. The Government is attempting to raise taxes and use technical barriers to limit imports.

A foreign banker in Viet Nam gave an optimistic forecast about Viet Nam’s trade deficit this year. It said that Viet Namese enterprises imported big quantities of steel and equipment in the first months of the year (up by 56% over the last year’s same period), and they won’t do that in the remaining months, which also means that the trade gap will be improved in the coming months.

In principle, the deficit of dollars due to the trade gap can be offset by other supplies of dollars (foreign investment, official development assistance capital and overseas remittance). The Ministry of Planning and Investment is trying to speed up the disbursement of foreign direct investment.

The VND/US$ exchange rate is also decided by another factor, the health of the dollar. The currency, which once depreciated in the world market, is now showing the signs of recovery.

Which forex policy is best?

Experts said that the State Bank of Viet Nam was not good at regulating the foreign exchange policy. That explained why the market once saw the dollar excess at one time and then the dollar shortage at other time.

In March 2008, the State Bank said that the VND revaluation will make imports cheaper, which can help curb inflation. Realizing that the central banks would not keep the weak VND any more to encourage export, businesses and people rushed to sell dollars. As a result, the dollars were in excess with hundreds of millions of dollars unable to find buyers. Meanwhile, the State Bank ignored the demand to sell dollars from businesses and the public, and exporters had to claim directly to the Prime Minister.

Just a couple of weeks later, the dollar witnessed an upturn. The State Bank had to sell dollars to stabilize the market (the sold volume was $1.2bil in April). However, it is clear that the central bank is applying the new forex policy under which the VND is weakening against the dollar. (Tuoi tre)