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Foreign currency reserve and state secrets
Governor of the State Bank of Vietnam Nguyen Van Giau has made an announcement considered the most surprising declaration since he took up the post as head of the central bank. Giau revealed the foreign currency reserve of Vietnam in an effort to calm international investors.
Giau said: “Under the current laws, the figure about foreign currency reserve must not be made public. However, in this case, we have got the nod from the Prime Minister to declare the figure. Vietnam’s current foreign currency reserve is $20.7bil,” Giau said during an online dialogue between high-ranking officials of the government of Vietnam and foreign investors from two big regional financial centres, Hong Kong and Singapore.
The unprecedented dialogue was sponsored by the World Bank (WB) with the participation of the Asia Development Bank (ADB), the institutions that have been supporting and encouraging the policies in most of Vietnam’s development issues. It is clear that WB and ADB, with their influence and prestige, want to create a way for Vietnam to explain to international investors about its current situation, which has been distorted by many international financial institutions.
However, it has been asked why the governor of the central bank does not have the authority to announce the foreign currency reserve. A financial expert of WB, who asked to remain anonymous, said that this relates to a legal document on secret-keeping within the system of the State Bank released in 2006. The document, quoting the regulations in a lot of ordinances, decrees and circulars, stipulates that the revelation of state information in the banking sector must be approved by competent agencies.
However, in fact, figures about foreign currency reserves sometimes still appear in newspapers of international financial institutions, which quote State Bank sources.
At the end of Q3 2007, the Prime Minister revealed that Vietnam had purchased $9bil in the first half of the year, raising the total foreign currency reserve to over $20bil. In March 2008, an official of the State Bank said that the foreign currency reserve increased by $10.1bil in 2007. Meanwhile, in April 2008, WB said that Vietnam’s foreign currency reserve was $21.6bil in 2007.
Experts can easily approximate Vietnam’s foreign currency reserve ratio if they have data and use economics formulas. For example, in 2007, the current account balance (trade, services, investment profits and overseas remittance) was ” -$6.992bil”, while capital account balance (foreign direct investment; short-, medium- and long-term loans, foreign portfolio investment and deposits) was “+$17,540bil”, which spells that the foreign currency reserve of Vietnam increased by $10.199bil in 2007 (error of $350mil).
Therefore, it is nearly impossible to keep secret the amount of foreign currency reserve.
One more question is why the figure catches so much attention from domestic and international investors. The answer is that the national foreign currency reserve guarantees the payment capability of Vietnam.
According to the General Statistics Office, the five-month trade deficit was a record high $14.4bil. With the average trade deficit of $2.88bil monthly, the total trade deficit in 2008 may reach $34.56bil in the worst scenario, and $21-23bil in the most optimistic. That is the reason why Morgan Stanley, JP Morgan or Merill Lynch thinks that Vietnam needs to devaluate the local currency by 39%.
However, the Vietnamese Prime Minister and Governor of the State Bank of Vietnam stated that Vietnam does not intend to devaluate the local currency, despite the fact that the VND/US$ exchange rate in the black market is always higher than the nominal exchange rate.
The exchange rate in the black market needs to be brought closer to the announced exchange rate, as the top priority of the government is to fight inflation.
While confirming the policy to keep the exchange rate stable, Vietnamese officials are trying to draw the attention of the international investment circle to Vietnam’s national foreign currency reserve. The State Bank of Vietnam plans to increase the foreign currency reserve by another $6bil this year.
VNN
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