SBV acts for foreign exchange stability

VietNamNet Bridge – The State Bank of Viet Nam started purchasing foreign currency and yesterday depreciated the dong by 0.03 per cent against last Friday, bringing the US dollar exchange rate to VND16,514.

The value of the dong has fallen by 19-20 per cent against the US dollar since early September. At commercial banks last week, US dollars were going for VND16,600, while on the black market, US dollars gained only a little more at around VND16,620.

The moves, made in the context of a local oversupply of US dollars, were designed to stablise the foreign exchange market (FX), State Bank Governor Nguyen Van Giau told Viet Nam News.

The value of the dong has fallen by 19-20 per cent against the US dollar since early September. At commercial banks last week, US dollars were going for VND16,600, while on the black market, US dollars gained only a little more at around VND16,620.

With the daily trading band currently at minus/plus 2 per cent, banks can list dollars at a maximum of VND16,844 and a minimum of VND16,183, higher than the previous buy/sell prices of VND16,560/16,610.

The central bank's move to depreciate the dong via the interbank market was greatly appreciated by the export community.

Boosting exports is considered tremendously important for development, a stimulus for production and the creation of more jobs. Moreoever, if the central bank did not intervene to stabilise exchange rates, the cheaper foreign currencies could have led to an even larger trade deficit.

"It's a good move by the central bank, which shows that SBV is managing exchange rates more flexibly to catch up with the real situation," Cao Sy Kiem, former governor of the State Bank and chairman of the Association for Small and Medium Sized Enterprises, told Viet Nam News.

Kiem noted that the current abundance of foreign currency was only temporary.

"I think it's a normal action when supply is abundant and demand is modest," Nguyen Thanh Toai, the deputy general director of Asia Commercial Bank told the newspaper.

Commercial banks are reporting to be over their cap of 30 per cent foreign currency in their total reserves.They are not allowed to hold more foreign currency than the cap, forcing the central bank to ultimately buy it.

Purchasing foreign currency and raising interbank exchange rates have stirred some concerns about a higher inflation rate, as more dong may be pumped into circulation.

In the first eight months of the year, Vietnam's trade deficit was US$16 billion, or 36.8 per cent of total export turnover, two times more than the same period in 2007. The consumer price index (CPI), the main indicator of inflation, in the first eight months of the year increased by 22.14 per cent over the same period of 2007.

Some bankers and economists assured that these recent moves would not result in higher inflation.

"The SBV has many tools to withdraw the dong back into their pockets such as issuing treasury notes with higher interest rates," said Kiem. Other foreign currency sources are expected to weaken in the latter part of the year, taking pressure off the foreign currency market. Remittance serves as one example. Normally, remittance from the US is a major source of foreign currency.

With the US in serious economic woes this year, a senior official of Vietcombank told Viet Nam News that remittance this year will likely be minimal.Moreover, foreign portfolio investment flow is forecast to be weaker than last year, and will put less pressure on the foreign currency market, since the stock market has not fully recovered.

(Source: SGT)