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 VIETNAM - Local currency gains in strength

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PostSubject: VIETNAM - Local currency gains in strength    Thu Mar 08, 2012 3:01 pm

March 8, 2012

Local currency gains in strength

Properly explained and enforced policies, together with drastic measures to curb dollarization, have helped to strengthen the local currency.

The downward pressure exerted upon the Vietnam dong from 2008 to 2011 was ascribed to the country’s significant balance-of-payments deficit, lackluster foreign reserves, soaring inflation, appalling financial policies and sour sentiments among market players.

This trend has been reversed recently, with the buying and selling prices of the greenback hovering about VND20,750 per dollar and VND20,850 per dollar at the moment.

Experts have pointed out several causes, including a more narrow trade deficit, rising remittances and emphatic gestures from the State Bank of Vietnam (SBV).

Dollar demand dwindles

Demand for dollars has dropped as Vietnam’s trade deficit has ebbed, hitting a 5-year low of $9.5 billion in 2011.

In fact, the trade deficit as a share of export earnings last year was the smallest in 2002-2011.

Though this was encouraging, inbound shipments of production inputs, which took the lion’s share of Vietnam’s important profile (90.6 percent in 2011), dropped.

According to the General Statistics Office, production inputs also experienced a dramatic drop in January 2012, 86.2 percent (vehicles and parts), 56 percent (cotton), 51.8 percent (cooking oil and fat), 53.5 percent (most ordinary metals), 30.9 percent (fabric) and 20.6 percent (materials for apparel and footwear).

Demand for dollars has therefore fallen since the second half of 2011.

Controlling exchange rate fluctuations.

Nguyen Van Binh, governor of SBV, succeeded in keeping exchange rate fluctuations in 2011 within 1 percent as he promised on September 7, 2011.

Consequently, confidence has returned. In early 2012, Binh said in the absence of internal and external shocks, the Vietnam dong/US dollar exchange rate would not change by more than 3 percent.

Binh’s statement is supported by such factors as escalating remittances, sinking trade deficits and high interest rates for dong deposits.

Over the past few weeks, many enterprises and individuals have sold dollars to banks, causing the price at which banks buy the greenback to dip from VND20,930/US dollar to VND20,750/US dollar.

Many people are also continuing to sell foreign currencies to increase their dong deposits, which are offered an interest rate of above 14 percent per annum.

This is further strengthening the dong.

Remittances were on the rise in 2011, reaching $9 billion and offering a good source of foreign currencies for exchange rate stabilization.

In previous years, when exchange rates in the free market were higher than at banks and control of foreign currency trading was not yet tightened, the flow of remittances into banks was extremely limited.

The gap between unofficial and official exchange rates has been reduced substantially.

This, coupled with the harsh penalties imposed on those breaking foreign currency trading rules (VND300-500 million), has paved the way for remittances to flood into banks instead of the realty sector (as they did in 2009 and 2010).

Yet, some are worried that if the current exchange rate persists in the long run, Vietnamese goods will be less competitive.

In fact, some economists have likened Vietnam’s latest approach to exchange rate management a double-edged sword.

That said, exchange rate adjustments this year, if any, will probably be within 3 percent.

Existing circumstances make it easier for SBV to widen the trading band for the dong this year.

It is likely that exchange rate management policies in the future will be in line with inflation control and dong interest reduction.

In late 2011, Tai Hui, regional head of economic research in Southeast Asia at Standard Chartered Bank, forecast that Vietnam’s exchange rate would hit VND21,400 per dollar in the first quarter of 2013 and VND22,000 per dollar in the third quarter of the same year.

If this prediction is true, SBV is likely to start its exchange rate adjustments at the end of the first quarter of 2012.

However, the prospect of such changes is unlikely to stop people from selling dollars for the dong at the moment.


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