VIETNAM - Dollar in continued short supply, exchange rate adjustment inevitable

by lexie Fri Nov 11, 2011 9:28 am

November 11, 2011

Dollar in continued short supply, exchange rate adjustment inevitable

Adjusting the dong/dollar exchange rate proves to be unavoidable move. The question for now is not whether to adjust the exchange rate further, but what to do to avoid a big devaluation of the local currency and maintain the monetary stability.

The foreseeable scenario

Standard Chartered Bank has predicted that the US dollar will gradually lose its value against most of the currencies in Asia, except the dong. The bank believes that the dong/dollar exchange rate may reach 22,000 dong per dollar by the end of 2012. The institution thinks that the State Bank of Vietnam has no other choice than adjusting the exchange rate to satisfy the market’s expectations.

The prediction is not a surprise at all. In mid 2011, it was the institution which forecast that the dong/dollar exchange rate was under a hard pressure and that the dollar price might climb to 21,800 dong per dollar by the end of 2011.

At that time, the prediction was rejected by Vietnamese high ranking officials, who affirmed that such as sharp devaluation of the dong will not occur. They also emphasized that the scenarios of the previous years would not repeat in 2011.

However, in reality, the scenarios were repeated, thus challenging the efforts by the central bank to stabilize the foreign currency market. The actual dollar price applied in transactions, not the quoted price, has reached 21,800 dong per dollar. Meanwhile, the official exchange rate has exceeded the 21, 000 dong per dollar threshold, which shows that the exchange rate is now really under a hard pressure.

The only encouraging thing is that the black market has become less burning. In the past, the dollar price on the black market was always much higher than the price quoted by commercial bank. However, the gap in the prices of the two markets has been narrowed recently, while the black market is no more a headache to the policy makers.

The dollar short supply is believed to continue in the last months of the year, especially when businesses are seeking to buy dollars to pay bank debts. Meanwhile, Standard Chartered Bank said that despite considerable improvement, Vietnam is still facing the current account deficit, and the low foreign currency reserves make people think that the local currency would depreciate further.

Le Xuan Nghia, Deputy Chair of the National Finance Supervision Council, said that the gap between the mobilized capital and the lending has reached 7.5 billion dollars (the outstanding loans in dollar have reached 30 billion dollars, while the mobilized capital in dollars was 22.5 billion dollars), adding that 7.5 billion dollars is not a big sum, but it would be a danger if the demand increases all occur in the last three months of the year.

The pressure on the exchange rate not only comes from the businesses which are seeking to buy dollars, but also from gold companies, which sold gold to stabilize the market and now have to use dollars to buy gold to balance their stocks.

Hopes put on the payment balance

The positive signs in the payment balance prove to be the biggest hope for state management agencies in their efforts to stabilize the foreign currency market. While the deficit of 3 billion dollars in payment balance occurred in 2010, it is now sure that Vietnam will see the surplus of one billion dollars in 2011.

The foreign currency reserves have increased from the level equal to the 3.5-week import turnover to 8-week import turnover. Especially, Vietnam hopes to see a sharp increase in the kieu hoi (overseas remittance) and the disbursements by investors in the last months of the year.

It is expected that the overseas remittance this year may reach 8.5 billion dollars, which is much higher than the expected level.

However, experts have pointed out that only a small part of the kieu hoi would be sold to banks to be put into circulation, about 10-15 percent. Meanwhile, the remaining sum of foreign currencies would either be sold on the black market, or kept at people’s coffers as their assets. This means that the kieu hoi may not help increase the foreign currency supply, while it would put a pressure on the exchange rate.

http://www.vietfinancenews.com/2011/11/dollar-in-continued-short-supply.html#more