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Forex management policy must be flexible but stable: Expert
Vo Tri Thanh, Head of the International Integration Studies Department under the Central Institute of Economic Management (CIEM), talks about the forex management policy he thinks Vietnam should pursue in 2009.
The global economic difficulties have forced Vietnam’s exports down, while exports are the main driving force for economic growth. Therefore, most experts believe that in 2009, Vietnam will pursue an exchange rate policy on devaluating the VND to boost exports.
At the end of 2008, countries spent several thousand billion dollars to rescue their economies. In theory, this would lead the greenback to devaluate. However, the contrary has occurred. Could you please explain?
The behaviour of investors always exists together with the factors of the economy. A lack of liquidity is now pervading the world. US investors are struggling with the crisis. In the crisis, investment opportunities become fewer and more difficult. Investors, who want to find safe shelters, still keep purchasing bonds, though the US government bond interest rates have become much lower. And the dollar price has been increasing.
Some experts have predicted that in 2009, the local currency will be devaluated by 5-6%. What do you think about the forecast?
Vietnam’s inflation rate in 2009 is expected to be curbed at less than 10%. Inflation is not a serious problem, but there are two other problems that may lead the greenback to increase in value. The trade deficit is expected to go down, but the demand for dollars will remain high due to limited foreign direct investment (FDI), overseas remittance and foreign portfolio investment. Meanwhile, the threat of deflation has forced the government to take action to stimulate demand, which may lead VND interest rates to decrease.
As such, there exist factors that can cause the VND’s devaluation in 2009. Economists have also said that the VND will tend to lose its value in 2009, and that the exchange rate may be VND17,800/US$1.
However, I think that the forecast will just be true for the first half of 2009. Meanwhile, we still need to keep watch over the market in the second half, since economic recovery may affect capital inflow and outflow.
The changes in the forex management policies will have different impacts on different groups of subjects. What do you think management agencies will do to ensure the benefits of all groups?
If the VND loses its value, people will make US$ deposits instead of VND. That explains why in the last many years, VND deposit interest rates always have been at levels higher than US$ deposit interest rates. Currently, the rate for VND deposits is 10% on average, while the rate for US$ deposits is 4%, and the VND devaluation rate is 3-4% per annum. As such, VND deposits, in theory, will be more profitable.
I think the most important factor in changing forex policies is to ensure macroeconomic management.
So, how should we understand the ‘flexible’ forex management policy to be followed by the State Bank of Vietnam?
The forex management policy needs to be flexible, which not only benefits exports, but also helps limit speculation. The currency, if overly appreciating, will restrict exports, curb economic growth.
The policy needs also to be stable so that it does not cause macroeconomic uncertainties. The changeable policies will cause difficulties for enterprises as they cannot accurately order their production plans, especially as Vietnamese enterprises are still not keen on using necessary tools to prevent shocks.
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