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SBV should be agile to steady forex market: Expert
The central bank should be more proactive in stabilizing the currency market, pumping in more dollars from the national reserve if required, Prof Tran Hoang Ngan, deputy rector of the HCM City University of Economics and a member of the National Advisory Council for Finance and Monetary Policies, said.
Speaking to Tuoi Tre, he said if it continues to be hesitant in taming the dollar’s rise on the black market, the official exchange rate will be forced to follow suit. A constantly devaluing currency will make Vietnam unattractive to foreign investors, he warned.
In August, when the dollar rose to VND20,000 on the black market, the State Bank of Vietnam was forced to devalue the dong to VND19,500 to a dollar. Now, with the rate heading towards VND21,000, the SBV is again expected to devalue the currency or plow more dollars into the system.
What is the effect of having two parallel forex rates on the business environment?
Since banks keep charging add-on fees to dollar borrowers, mostly businesses, production costs rise, lowering products’ competiveness.
It also keeps investors and depositors away from the subdued stock market and banking system since the profits made there cannot make up the losses from the currency’s depreciation.
Even foreign investors who are eager to invest here are in two minds when they see their investments in dollars exchanged at two different rates and take their investments to other markets.
What do you think about the central bank’s recent Circular 22?
The circular, which has stopped banks selling gold deposited by customers and using the proceeds for loans or converting into foreign currencies to ease the downward pressure on the dong, cannot have a positive effect on the market in the short run since there is still a gap between the international and domestic gold prices. This will cause speculators to hoard more greenbacks for illegal imports.
But in the long run, the new ruling will limit the circulation of gold in the economy and help curb gold smuggling and speculation, contributing to stabilizing the forex market.
Why is the dollar depreciating against almost other currencies but not the dong?
We should make it clear that the forex rate reflects the demand for the greenback in Vietnam.
While businesses who do not need the dollar right away stock for future needs, those who have it - as well as individual investors - do not want to sell since they think the dollar value could increase further, causing dollar speculators to buy more.
While other countries enjoy a trade surplus which increases dollar supply, Vietnam has trade deficit, which is likely to hit US$12 billion-14 billion this year. As more people lose confidence in the dong, it will weaken more and more.
So what is the solution?
We need both short-and long-term, market-oriented, and administrative measures.
The government should make the big economic picture clearer to the public, including forex rate control strategies, funnel more dollars into the market, and seek to stop the hoarding of dollars. They also have to ensure the public gain confidence in the dong, which will help reduce dollar demand.
In the long run, the trade deficit, budget overspending, and the economy’s overheating must be checked.
Why only in the long term?
Public spending and its efficiency have so far had an inverse relationship. So reducing public spending will help trim the trade deficit.
Moderate growth [as opposed to rapid] will cut back demand for imports. If the trade deficit keeps eating up 20 percent of export earnings, how can Vietnam tame inflation and lower interest rates to boost production.
Many say the dong is still overvalued. So do we need further devaluation?
Since this is a double-edged sword, we cannot follow other country’s models.
The more we devalue our currency, the higher the inflation and greater the risk to economic stability.
It is a vicious circle. Despite efforts to adjust the forex rate for years to cut imports, Vietnam has failed to achieve its targets.
Since our support industries are still in their infancy, more dong devaluation means more expensive imports for businesses and higher inflation.
So it is a balancing act: the forex rate should be such that Vietnam will still be an attractive destination for foreign investment but macroeconomic indexes remain stable.
The greenback reached its lifetime high against the dong Wednesday at VND21,000 to a dollar, with the spread between the buying and selling rates at VND200.
This enabled gold to rise by VND120,000 a tael [37.5 grams,1.2 troy ounces] to VND33.77 million-33.85 million. On the same day, the international rate fell by around VND125,000 a tael.
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