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No forex rate adjustment – a real relief
The director of the State Bank of Vietnam (SBV), Nguyen Van Binh, has told Tuoi Tre that the operating mechanism of the foreign exchange rate between the US dollar and the Vietnam dong in 2013 would not change from 2012.
The purchasing power of the dong over the dollar was stable during the last year, and the former even gained value against the latter by year-end, Binh said.
Before the Lunar New Year festival, or Tet, Governor Binh told Tuoi Tre that there were experts suggesting that the SBV devalue the dong against the greenback, but SBV refused to do so to entrench the hard-earned value of the national currency.
But the side effect of such suggestions, aimed at encouraging exports, has stirred up market concern over a possible devaluation [as it did in 2011 right after Tet], offering speculators a chance to take advantage of the situation by pushing the unofficial forex rate [in the black market] for profits.
This is the first time ever the central bank has been able to state that it can proactively adjust the rate in its favor: let it fall, keep it stable or let the dong appreciate against the greenback, rather than always being forced to devalue the dong against the dollar as before.
Secondly, though the purchasing power of goods in the dong has been reduced, it is still under pressure to appreciate against the dollar, so the central bank must continually buy dollars to keep the dong from revaluing against the dollar, which is detrimental to the export price of Vietnamese goods.
Binh told Tuoi Tre that the SBV had raked in some $20 billion in 2012 and a short time just before Tet, and a difficult task for the agency in 2013 is to buy more dollars by pumping out the dong, while still keeping an eye on inflation control.
An economic expert told Tuoi Tre that if the central bank did not buy dollars, the market would be flooded with greenbacks, and the forex rate would drop below VND20,000 per dollar.
In the past few months, the exchange rate has stabilized at less than VND21,000 per dollar, and even if the rate surges over the VND21,000 mark at some point it will still be considered normal.
Regarding the proposals on a forex rate increase, the central bank has officially refused to follow any such advice.
Deeper analysis has revealed two reasons for the central bank’s disapproval of the adjustment to encourage exports.
Firstly, exports remained favorable in 2012 with $114.57 billion in turnover, while imports were at $113.79 billion, resulting in a trade surplus of $780 million, in contrast to a $9.84 billion trade deficit in 2011.
There are many ways to encourage exports, such as trade promotion and the reduction of interest rates, but devaluation would cause many implications, especially rising inflation.
Secondly, the government has assigned the central bank to control inflation. Unlike before, the Government also assigned SBV to control a number of indicators, including the supply of Vietnam dong on the market [which rose 22.4 percent in 2012].
So if the dong depreciates further against the U.S. dollar, inflation will rear its ugly head again, making the central bank’s task of controlling inflation difficult.
Recently, Tuoi Tre received a message from Tran Hoang Ngan, a member of the National Assembly and the National Advisory Council for Monetary Policy.
Ngan said that "exchange rate stability has many good points, contributing to the control of inflation. The central bank’s latest move to buy dollars, thus preventing the dong from revaluing against the dollar is also supportive for exports."
According to Ngan, if the dong was devalued, there would be price shocks, creating a domino effect which is detrimental to the economy, including exporters.
Though still a sensitive topic, over the past year the exchange rate in the free market has remained rather stable, following the official rate quoted at banks. In 2012, those holding dollars found that this strategy was not as profitable as it was in the past.
The country’s foreign exchange reserves have also soared to an unprecedented level.
If this situation is repeated and the central bank succeeds in stabilizing the dong’s purchasing power with other goods, rather than just the U.S. dollar, it will be like the act of building up trust in the local currency.
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