Vietnam dong appreciating says financial research team

VietFinanceNews.com – The Vietnamese currency, the Vietnam dong, is increasing in value, said a research team of the Institute for Financial Strategies and Policies under the Ministry of Finance at a recent conference.

By the end of 2011, the dong appreciated 23.8 percent and 5.7 percent against the US dollar and a “basket” of foreign currencies of other trading partners, said the team at “Coordination of fiscal and monetary policies in macroeconomic regulation” conference held by the ministry in Hanoi.

On the foreign exchange market, the exchange rate has relatively been stable since early this year.

Local exporters are still actively selling foreign currencies to credit institutions, leading to negligible differences in the forex rate between the dong and the greenback.

The prices of the greenback at commercial banks have even lower than the benchmark rate set by the State Bank of Vietnam (SBV).

The depreciation of the greenback against other currencies in recent years is the main cause for the appreciation of the dong, said the team.

However, the research team said, a stable exchange rate still remains a challenge for local policymakers.

Accordingly, as inflation will be on a downward trend until the year-end due to the effects of tightening monetary and fiscal policies, SBV should consider minor adjustments to encourage exports, reduce trade deficit, and improve balance of payments and the national forex reserves.

According to SBV, the average interbank forex rate last week remained unchanged at VND20,828 a dollar.

The rate has been stabilized for the 19th consecutive week, the longest chain since the beginning of 2011.

Earlier last week, many banks raised the ask price for the greenback by VND20-30 a dollar over the previous to VND20,900 a dollar. However, from mid-week, the rate started to fall.

Last week, the bid and ask prices at Vietcombank were at VND20,820 a dollar and VND20,870 dong a dollar, unchanged from the previous week.

Long-term stability?

The SBV Governor Nguyen Van Binh early this year said that the forex rate between the greenback and the Vietnam dong would be adjusted within 2-3 percent in 2012, showing his confidence on the stability of the forex rate.

Such a confident statement is needed for market then since it will be firm foundation for investors and the business community to rely on.

But, about that same time, newswire Vneconomy found the concerns behind the stability of the forex rate raised by two professional bodies, the Economic Committee of the National Assembly (ECNA) and the National Financial Supervisory Commission (NFSC).

The ECNA said the exchange rate should be operating flexibility and should not be anchored to such a narrow range of 2-3 percent.

It will narrow maneuverability of the monetary policy, affecting exports and can trigger hot money inflows into Vietnam to take advantage of the difference in interest rates.

Such concise recommendation has several implications.

The commitment from SBV will make the urgent need in cutting the dong interest rate faced more hurdles as it create adverse impact on the exchange rate.

Secondly, ECNA said the current environment is stimulating the hot inflow, but if there are signs of unfavorable forex adjustment leading to a reversal, it will cause more pressure on the forex rates.

At this point, the ECNA has a rendezvous” with the NFSC, as the latter said the difference in the dong and the US dollar interest rates will create a cross-border arbitrage inflow into Vietnam in two forms of indirect investment and overseas short-term lending.

“This will help increase the supply of foreign currency to facilitate exchange rate stability, increase the national reserve.”

“But this short-term inflow will quickly move out of Vietnam if the forex rate is adjusted too fast with a wider range than committed.”

“This is in the medium-term risk if the value of the outflow is larger than the national reserve,” said NFSC.

The differences in inflation this year between Vietnam and other major trading partners will be in about 5 – 7 percent, NFSC mentioned another aspect hidden behind the stability of exchange rates.

According to the NFSC’s calculations, by the end of 2011, real multilateral exchange rate (REER), which is compared with a basket of 19 currencies of major trading partners with reference to the base year 2000, at around 94.56, meaning the dong is still some 5.46 percent higher than its real value.

So, if a fixed exchange rate is kept, the dong will be valued higher than other currencies, thus affecting the competitiveness of exporting activities of Vietnam in the future.

With the analysis, NFSC said that the ability to maintain a stable exchange rate in 2012 can still be realized, but SBV need flexibility in adjusting the exchange rate by selecting the appropriate framework for harmony between many economic targets.

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