ANZ calls for ending dual dong rate for importers, banks

Monday, June 23, 2008
Viet Nam must narrow the 10 percent difference between its two exchange rates to restore confidence in the dong, Australia & New Zealand Banking Group Ltd. has said.

The dong rate used by some commercial banks has fallen to as low as 18,000 per dollar, ANZ said, compared with the 16,611 rate used by selected importers.

The central bank should intervene with banks to unify the two rates, economist Paul Gruenwald at ANZ wrote.

“Benign neglect of the parallel market is fraught with risks,’’ the Singapore-based Gruenwald, head of Asian economics at the bank, wrote in a research note which he confirmed by telephone.

A weakening of the dong in the unofficial market “could set in motion inflation and capital outflows which may be difficult to manage.’’

Three credit-rating companies have cut Vietnam’s debt rating outlook since May, and Morgan Stanley last month said the dong is set for a “currency crisis’’ as inflation has risen to 25% and the trade deficit has surged.

The government does not plan to let the dong depreciate because it would affect the economy, Finance Minister Vu Van Ninh said June 15.

The central bank weakened the dong reference rate by 2% on June 11 to prevent currency speculation.

The currency is officially allowed to trade 1 percent either side of this.

Central banks intervene in currency markets by buying or selling foreign exchange.

Lost relevance

Forwards contracts are pricing in a 30% drop in the next year, after taking into account interest-rate differentials, according to offshore 12-month non-deliverable forwards at 23,975 per dollar.

Forwards are agreements in which assets are bought and sold for future delivery at prices determined now.

The official rate “has lost its relevance as a price signal,’’ Gruenwald wrote.

Vietnam is unlikely to face a currency depreciation like that of Thailand in 1997 as it has sufficient foreign-exchange reserves to defend the dong, ANZ said.

“The trick is therefore to maintain domestic confidence’’ and prevent conversion of dong assets into dollars, the note said, adding that estimated foreign currency deposits are 25% of total deposits compared to over 40% in 2000.

The central bank should also add to interest-rate increases to increase the allure of the nation’s assets and reduce government spending, Gruenwald wrote.

The central bank has raised the benchmark interest rates three times this year to 14 percent, the highest in Asia, as the government tries to curb accelerating inflation by tightening credit and cutting the supply of money. (Bloomberg)