Vietnam - Experts say it’s impossible to keep exchange rate fluctuation at below 1%

October 12, 2011



Experts say it’s impossible to keep exchange rate fluctuation at below 1%


The official exchange rate fluctuation in recent days is not the thing experts are worried about. However, they have expressed the doubts about the feasibility of the government’s plan to curb the exchange rate fluctuation at below one percent by the end of the year.

Prior to October 5, the interbank dong/dollar exchange rate announced every day by the State Bank of Vietnam always stayed at 20,628 dong per dollar. However, since October 5, the State Bank has continuously raised the interbank exchange rate to 20,638 dong, then to 20,648 dong, and to 20,653 dong per dollar on October 7.


Commercial banks have immediately raised their quoted exchange rates to the ceiling levels, while the gap between the sale and the purchase price has been narrowed. In many cases, the actual dollar prices applied in transactions were higher than the quoted prices.


Commenting about the move by the State Bank to raise the official exchange rate continuously over the last few days, Dr Le Tham Duong from the HCM City Banking University, said that the increases have been insignificant which should be seen as an adjustment to “explore the situation”.


Regarding the statement by the State Bank of Vietnam that the exchange rate will not fluctuate by more than one percent from now to the end of the year, Duong said that this shows the determination to keep the exchange rate stable. The central bank has every reason to believe that the goal is attainable: Vietnam has the foreign currency reserves worth 16 billion dollars, the surplus in payment balance, the positive position of foreign currencies of commercial banks and the controlled outstanding loans in foreign currencies.


However, Duong said, “the exchange rate may bear the influences of many unforeseen factors.”


One of the “unforeseen factors”, according to Duong, is that despite the determination to force the foreign currency lending (the required compulsory reserve ratio for deposits has been raised), the outstanding loans in foreign currencies keep rising. Meanwhile, the gold prices have been fluctuating heavily with the domestic prices always higher than the world’s price. This will prompt gold smuggling, which may push the dong/dollar exchange rate up.


He went on to say that the forecast bad performance of the world’s economy would also have bad impacts on the Vietnamese economy and made the plan to congest the exchange rate fluctuation impossible.


“The pressure on the exchange rate seems to be bigger than the determination and the strength of the central bank. Therefore, the State Bank needs to keep cautious, or the dollar price would increase, thus badly affecting the plan to fight against the inflation,” Duong said.


Le Dang Doanh, a well known economist, has also expressed his worries that the central bank may fail to implement the plan to control the exchange rate fluctuation.


Doanh said that the foreign currency supply and demand much depends on the import and export, while Vietnam still imports more than exports. Meanwhile, Vietnamese enterprises have borrowed a big amount of dollars (they prefer dollar to dong loans because the dong interest rates are overly high), which would put a hard pressure on the exchange rate.


Also according to Doanh, the dong has lost 22 percent in its value in reality, but the currency still has been overvalued, which is not beneficial for export.


“It is necessary to force the inflation rate down to keep the exchange rate stable. It will not have much significance if we try to keep the exchange rate stable in the context of high inflation,” Doanh said.


Dr Le Xuan Nghia, Deputy Chair of the National Finance Supervision Council, also said that the pressure on the exchange rate is hard. The outstanding loans in foreign currencies have reached 30 billion dollars, while the mobilized capital has been 22.5 billion dollars only, which means the gap of 7.5 billion dollars between the lent and the mobilized money.


“7.5 billion dollars is not a big sum, but it would be dangerous if all the loans become mature in the last three months of the year,” Nghia warned.


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