SBV’s decision to devaluate dong described as wise move

by RED LILY Mon Oct 17, 2011 10:24 am

FOUND AT THE GET TEAM FORUM 10-17-11

SBV’s decision to devaluate dong described as wise move

VietNamNet Bridge – Experts all believe that the decision by the State Bank of Vietnam to adjust the interbank exchange rate by another 10 dong per dollar to 20,678 dong per dollar is a “reasonable, flexible and timely” move. The devaluation has been made after the State Bank announced that the exchange rate adjustment, if it is made, will not be higher than one percent by the end of 2011.
VND continues to slide against USD

After keeping the dong/dollar exchange rate stable for more than one month, the State Bank of Vietnam has been adjusting the exchange rate continuously since the beginning of October. To date, the dollar price has appreciated by 50 dong per dollar in comparison with September, or 0.24 percent.

The 0.24 percent dong devaluation is not too big which is just within the one percent limit promised by the State Bank. However, the consecutive exchange rate adjustment in the last few days shows that the pressure on the dong/dollar exchange rate is getting harder.

Dr Le Dang Doanh has also affirmed that the dollar price has been appreciating significantly recently, but the appreciation has not exceeded the one percent threshold. “I believe that the exchange rate adjustment is a reasonable move by the State Bank,” Doanh said.

The current dollar lending interest rates are clearly much lower than the dong interest rates, which has prompted businesses to borrow dollars instead of dong. The outstanding loans in foreign currencies have reportedly reached 7.6 billion dollars. The problem is that many of the borrowers borrow dollars and then sell dollars for Vietnam dong to do business.

This means that when the loans become matured, they will have to buy dollars to pay debts, while the capability of earning dollars to pay debts is not certain, because they do have earnings from exports.

As such, if businesses continue borrowing in dollars even though they do not have earnings dollars to pay debts, they will have to buy dollars on the market. This would lead to the overly high demand for dollars at the same time, thus causing uncertainties to the market.

In order to dispel the risk, it is necessary to make foreign currency loans no more attractive to businesses.

“I believe that the dollar appreciation would help discourage businesses to borrow dollars from banks, especially the ones which have to use their dong to buy dollars, because they will suffer loss if the exchange rate increases,” Doanh said.

Earlier this year, a lot of businesses which borrowed dollars, once “tasted the bitterness” when the dollar price increased sharply by 9.3 percent.

The latest report released by the State Bank of Vietnam showed that in the week from September 24 to September 30, the dollar lending interest rates stayed between six and 7.5 percent for short term loans and 7.5-8 percent for long term loans. Meanwhile, the dong lending interest rates were much higher, 18-19 percent per annum.

In fact, the dong interest rates were much higher than the reported rates. Businesses said that they actually had to borrow money at the interest rates of 21-23 percent

Agreeing with Doanh, Dr Nguyen Minh Phong said that the central bank has made a reasonable move when adjusting the exchange rate, because the new exchange rate can truly reflect the foreign currency market performance. The decision will also help reduce the virtual demand for dollars, while people and businesses do not want to hoard up dollars any more

Dr Le Tham Duong thinks that the dollar demand is now very big which may cause the supply and demand imbalance. The big pressure on the dollar demand has been caused not only by the loans to be matured in the last months of the year, but also by the influences of the gold market. Therefore, adjusting the exchange rate now is considered a wise move.

Though the State Bank has adjusted the exchange rate, but this does not make people think that the dollar price would keep rising continuously, because the central bank has promised that the adjustment would not be higher than one percent. Therefore, Duong said, businesses would feel secure when planning their business.

Dat Viet