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State Bank acts for foreign exchange stability
The State Bank of Vietnam started purchasing foreign currency and on September 17 depreciated the dong by 0.03 percent against last Friday, bringing the US dollar exchange rate to 16,514 VND.
The moves, made in the context of a local supply of US dollars, were designed to stabilise the foreign exchange market (FX), State Bank Governor Nguyen Van Giau told Vietnam News.
The value of the dong has fallen by 19-20 percent against the US dollar since early September. At commercial banks last week, US dollar were going for 16,600 VND, while on the black market, US dollar gained only a little more at around 16,620 VND.
With the daily trading band currently at minus/plus 2 percent, banks can list dollars at a maximum of 16,844 VND and a minimum of 16,183 VND, higher than the previous buy/sell prices of 16,560/16,610 VND.
The central bank’s move to depreciate the dong via the interbank market was greatly appreciated by the export community.
Boosting export is considered tremendously important for development, a stimulus for production and the creation of more jobs.
Moreover, 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 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 Vietnam 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 percent 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 16 billion USD, or 36.8 percent 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 percent 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 Vietnam 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.
VNA
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