Vietnam - Exchange rates should stabilise before Tet

by lexie Thu Oct 20, 2011 11:23 am

October 20, 2011

Exchange rates should stabilise before Tet

The former State Bank of Viet Nam Governor Le Duc Thuy discusses the causes of high interest rates and the weakening dong with Vietnamese reporters on the sidelines of an economic conference on Tuesday.

What is your reaction to the fluctuations in the foreign exchange rate in recent weeks?

The State Bank of Viet Nam has adjusted the official exchange rate, even as black market rates have fallen from their recent record levels. People thought that the adjustment was to prepare for a major devaluation, so those with a real need carried out their transactions instead of holding onto foreign currency. That's a good thing for the market. If the State Bank's goal to adjust the foreign exchange by less than 1 per cent is successful, there will be a difference among official, interbank and black market rates.

The situation will continue to the end of this year or even until the Tet holiday. If the State Bank carries out the proper policies, the exchange rate should stabilise before the holiday. In my opinion, the black market rate will not go over VND22,000 per US dollar.

Whether or not the supply of US dollars goes up, interest rates will go up. Interest rates have increased because investment flows into emerging economies have fallen. Developed countries have had to cope with difficulties in liquidity that reduce investment and some have even had to borrow from emerging economies. Banks could call back in 50-70 per cent of their capital lent to countries that default on public debts, so the supply of currency could become more tenuous.

I think that banks and businesses always feel forex pressures, and they haven't been as serious as people thought they would back in February.

Some think the Vietnamese dong interest rate remains too high, even though the Asian Development Bank has noted that the rate is actually low when compared to our inflation rate, which has been high. How do your react to this?

There are two paradoxes. We seek to attract depositors at a negative real interest rate, taking inflation into account, while the lending rate has been 23 per cent. I thought that we should follow real dong interest rate, but the Government is expecting single-digit inflation next year, or no more than 10-12 per cent.

I have recommended increasing compulsory reserves from the current 3-5 per cent to 10 per cent. That would mean there would be VND250 trillion (US$12 billion) backing country's entire banking system.

Some think that the compulsory reserves requirements place commercial banks at a disadvantage. The State Bank could pay the banks interest on the reserves to avoid losses on the idle capital.

There is no law to prohit that. The State Bank could pay 12-13 per cent per year on the reserves, since commercial banks have also sold bonds with interest rates of 12 per cent.

Do we need to structure the banking system?

This is the time not only to restructure the banking system but the entire economy.

Every bank would have a specific plan to restructure.

We should make the financial sector more transparent in order to prevent bad debts. We should not allow any bank to become insolvent.

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