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Adjusting exchange rate: The opportunity, the strand and the dog
“Vietnam will not adjust the dong/dollar exchange rate before Tet” was the message released by the Chair of the National Financial Supervision Council three months ago, in October 2010.
For the last three months, the gap between the exchange rate quoted by commercial bank and the exchange rate on the black market has been 7-10 percent. The big gap, which has never been seen before, has caused big difficulties to import-export companies, nourishing the dual-price scheme.
Since the beginning of the week, through different information channels, the State Bank of Vietnam has been trying to convey a message that the foreign currency supply is now very profuse. Governor of the State Bank of Vietnam Nguyen Van Giau said that the foreign currency supply and demand are now in balance and that the central bank does not need to make direct intervention.
Especially, banks, which always had the short foreign currency position in November, now have long position. This means that commercial banks now have a profuse amount of dollars to sell, and the time when banks had to refuse businesses’ demand for purchasing foreign currencies is over.
As an independent analyst, the Thang Long Securities Company on January 26 released a report where the word “opportunity” was used when mentioning the intention to adjust the dong/dollar exchange rate.
The subjects on the market, including commercial banks, now accept to make transactions at the black market’s exchange rates. The adjustment of the official exchange rate may cause the worries about the pressure on the inflation. However, the messages from the Government show that the exchange rate adjustment would be made, sooner or later.
And the time before the Tet holiday seems to be the most suitable time.
Analysts believe that there are enough conditions now to do that: the volume of kieu hoi(Remittances from overseas?) has become profuse, the foreign disbursement rate has been high, while people now do not try to keep dollars any more because of the high Vietnam dong interest rates. Besides, the exchange rate on the black market has decreased from 21,500 dong per dollar to 21,000 dong.
Thang Long Securities Company believes that the current profuse supply of foreign currencies will help prevent big fluctuations on the black market, while also narrowinng the gap between the official exchange rate and the exchange rate on the black market. Especially, the exchange rate adjustment at this moment, when the monetary policies are tightened, may be able to persuade businesses to sell foreign currencies to commercial banks.
“It’s now the right time for the State Bank to purchase foreign currencies and increase the foreign currency reserves. Besides, the adjustment before a long Tet holiday will help prevent a psychological shock,” the report reads.
The strand and the dog
When talking with Thoi bao Kinh te Vietnam about the exchange rate policy, Truong Van Phuoc, General Director of Eximbank, referred to a strand and a dog.
A girl and a dog take a walk in the “exchange rate park”. The thing that connects the two subjects (The girl and the dog) is a strand. It is necessary to use the strand, because the dog, due to the surrounding impacts, may cause troubles. A short strand would be better than a long strand.
Currently, the State Bank of Vietnam sets up the forex trading band at +/- 3 percent (The exchange rates quoted by commercial banks must not be higher or lower by more than 3 percent than the official exchange rates announced by the central bank). And the trading band can be described as the strand in Phuoc’s story. Phuoc thinks it is necessary to raise the official exchange rate to a reasonable level and then to narrow the trading band in order to be able to control the exchange rate more easily.
vietnamnet
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