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Experts call for loosening of forex trading band
The dollar supply and demand imbalance can be seen clearly in the fact that the VND/US$ exchange rates quoted by commercial banks are always at the ceiling level. Experts say that it is now the right time to loosen the forex trading band.
The currently applied forex trading band is +/-1%, which means that the VND/US$ exchange rates announced by commercial banks must not be 1% higher or 1% lower than the official rate announced by the State Bank of Vietnam.
Experts think that the State Bank of Vietnam should raise the forex trading band in order to create favourable conditions for banks to buy dollars from export companies. Currently, banks are seriously lacking dollars, but they cannot raise purchasing prices due to the low ceiling of the dollar price.
However, many experts have warned that the widening of the foreign trading band may do more harm than good, and that the move may bring side effects, especially as people are still worried about further dollar price increases.
In an attempt to regulate the forex market more flexibly, the State Bank of Vietnam decided to raise the interbank exchange rate from VND16,139/US$1 to VND16,461/US$1 for June 11. With the 1% trading band, banks could quote dollar prices from VND16,296 to VND16,626/US$1.
According to Tai Hui, Head of the Analysis Division for Southeast Asia under Standard Chartered Bank, though the trading band remained at +/-1%, the devaluation of the VND by 2% on June 10 could be understood as an action which aimed to bring the official exchange rate closer to the actual exchange rate on the market.
Mr Tai Hui said that he expected further adjustments to be made in the time to come in order to ease the pressure on the trade deficit. However, he has warned that dollar price adjustments need to be carried out step by step in order to avoid shocking the market and to prevent people from ‘boycotting’ the VND.
Nguyen Dinh Tung, Deputy General Director of VIB Bank, said that it is very difficult to anticipate the VND/US$ exchange rates for the time to come. However, Tung believes that the exchange rate will not increase.
The government of Vietnam, he said, has been pursuing a policy on strictly controlling the prices of foreign currencies. If the State Bank accepts a very wide foreign trading band, this could be thought to be an attempt to float the VND.
Meanwhile, Vietnamese people and Vietnamese banks are not ready for this, Tung said.
The director of a joint stock bank also said that it is necessary to maintain the foreign trading band scheme, which allows the country to keep foreign currencies in balance.
As the central bank has raised the basic VND deposit interest rate to 14% per annum, the VND deposit interest rates of many banks have become more attractive, which has made the VND much more attractive than the dollar . Currently, the dollar interest rate is just equal to a half of the rate for VND deposits.
The price of the dollar is now increasing and businesses complain that they cannot purchase dollars from banks.
Cao Sy Kiem, a member of the National Advisory Council for Monetary Policies, said that there might be several possible reasons for the problem, either the forex policy is not suitable, or the 1% foreign trading band is not suitable, or there are problems in policy implementation.
In related news, the Ministry of Industry and Trade has asked the government to allow export companies to borrow VND at interest rates equal to the rates applied to US$ loans.
The ministry finds it necessary to help export companies settle difficulties and gain the targeted export turnover of $61.2bil this year.
The ministry said that this will help export companies collect domestically-sourced materials for making products for export. The volume of loans with preferential interest rates will be decided based on the foreign currencies the export companies can get from their export deals.
VNN
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