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Forex market strained as demand overtakes dollar supply
The foreign exchange market has become strained as firms’ demand for dollars has exceeded purchased supplies of commercial banks, forcing many firms to buy the greenback on the black market at higher prices.
The situation has developed over the last three weeks, Deputy Governor of the State Bank of Vietnam (SBV) Nguyen Van Binh said in a report on the SBV's website. Less than a month after the central bank widened its trading band on March 24 to 5 percent on either side of a fixed daily midpoint from the earlier 3 percent, commercial banks have had to apply both buying and selling foreign exchange rates at the ceiling levels, he said.
Nguyen Van Binh, Director of the Center for Material and Equipment Imports, said firms now have to wait seven to 10 days for buying the dollars they need from commercial banks.
To get dollars, his company has to register the purchase with commercial banks some days earlier and deposit dong, director Binh said, adding that some other firms have even had to buy euros and then exchange them for dollars.
However, one commercial bank by itself has not been able to meet his center’s demand for dollars, and it has registered to buy the greenback from three or four banks. The company needs millions of dollars every month to pay for imports.
Afraid of missing business opportunities while waiting for dollars from the banks, his company has had to buy dollars unofficially at higher prices.
“Dollar prices in the black market are VND200-500 per dollar higher than those offered by commercial banks. Today [May 15], we had to buy dollars at VND260 higher per dollar from the market,” he said.
Deputy Director of the Hanoi Trade Corporation (Hapro) Vu Thanh Son said, “We have to wait several days to buy dollars from commercial banks. This has affected our import activities.”
Each month, Son’s business spends $5-7 million on imports, and his company’s foreign currency source from exports is not enough. “We have to actively register to buy dollars from banks, and keep good relations with six or seven banks so that they can help us get the foreign currency we need,” Son said.
The head of a paper firm, who wished to be unnamed, said his company could not manage enough dollars now to pay for imports under already signed contracts. “Commercial banks have refused our request for dollars because of their thin supply. If we buy dollars from the black market, the higher prices will make us lose money.”
Explaining the dollar shortage, deputy governor Binh said dollar supply from exports, foreign direct investment (FDI), remittances and foreign loans has declined due to impacts of the global economic crisis, which has caused worries about dong devaluation, leading to dollar hoarding in the economy.
He also said importers, who need dollars for their payments, preferred dong loans to benefit from the 4-percent interest subsidy and then buy the greenback from banks.
As exporters have deposited dollars instead of selling them and many residents have switched their dong deposits to dollar deposits on dong devaluation concerns, deposits in the greenback increased at an unusually high rate of 3.35 percent in the first four months of this year, the deputy governor said.
“This is an abnormal situation,” he said.
The banking system is loaded with foreign currencies for lending but still lacks funds for selling, leading to the strain in the foreign exchange market, he said. Banks are not allowed to sell dollars held in deposits.
To deal with the situation, commercial banks should reduce interest rates on dollar deposits as well as rates on dollar loans to spur borrowing and discourage deposits, Binh said, noting that the interest rates on dollar deposits should be 1-2 percent at maximum, compared with the current of 2-3 percent, and interest rates on dollars loans should be 1.5-3.5 percent.
SBV is also considering dollar loans under an interest subsidy program, he said.
In addition, SBV is implementing a scheme with commercial banks on a large scale under which banks can exchange dollars against deposits with SBV for Vietnamese dong, and the central bank would then sell the dollars to banks that need them.
“This would solve the problem of redundant foreign currency funds for lending by commercial banks, and help the central bank have more foreign currency funds to sell, creating liquidity and stabilizing the foreign exchange market,” the deputy governor said.
Binh said the dong is expected to fall against the dollar by 5-6 percent in 2009. But he added: “The state is fully able to balance foreign currency demands to serve its socioeconomic development, so there is no reason to expect a big devaluation of the dong.”
Vietnam’s foreign currency reserves are now at $20 billion, enough to cover all trade imbalances, he said. In the first four months of this year, Vietnam posted a trade surplus of $2.6 billion.
Ngan Anh
thanhnien
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