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Vietnam - Spillover effects from the blocked way

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Vietnam - Spillover effects from the blocked way Empty Vietnam - Spillover effects from the blocked way

Post by lexie Tue Oct 04, 2011 1:34 pm

October 4, 2011

Spillover effects from the blocked way

The most heated issue mainstreamed on local media these days is undisputedly the gold price and the mechanism behind the gold fever.

For days on end, the local gold price stays higher than the global price by some VND4 million a tael, or rather, the precious metal is some US$180 more expensive at home than abroad for a troy ounce. Long queues of gold buyers are seen lining up at gold shops to snap up all available, despite their being aware that they are taking the huge risks.

For a country whose gold stock is estimated at up to 500 tons, the prolonged fever is phenomenal in the sense that no effective solutions are taken to douse the fire, and the central bank’s reaction is quite muted. Just a tiny part of the gold stock, say experts, will be more than sufficient to quench the thirst, but it looks like that the central State Bank of Vietnam has chosen the way of inaction. In other words, the central bank has refused to unleash the treasure that has been blocked from flowing out for months.

The gold rush seemingly took root in the central bank’s move to force commercial banks to adhere to the ceiling deposit rate at 14% annually for Vietnam dong, a rate much lower than the real inflation. Such a decision turned the tide – regrettably to the undesirable side to some extent – when many people shift their money to the safe-haven asset of gold. But the precious metal is not ample, as supply largely depends on the closely-controlled quota system meant by the central bank to choke off adverse impact on the foreign exchange rate and the country’s foreign reserves.

Sai Gon Tiep Thi says the restrictive policy towards gold imports by the central bank causes a shortfall on the market, but the key reason is the mechanism preventing gold from flowing freely. Citing figures from banks that were mobilizing gold before a ban months ago, the paper says total gold deposit amounted to nearly two million tales, and “assuming that these banks can sell 80% of their gold deposit, such an amount will drag down the gold price immediately.”

Thoi bao Kinh te Sai Gon in an article titled “Look directly into gold” says the central bank has gone to extremes when overly controlling the gold market by setting up hurdles to block the gold flow.

“Banks are banned from mobilizing and lending gold… On the market, gold is feverishly hot while inside banks, gold is frozen,” says the weekly newsmagazine, which cites the central bank’s figure to claim there are up to three million tales being shut in.

In an online discussion organized by the news website Vnexpress this week, experts also pinpoint the central bank is to blame for the gold fever.

Vo Tri Thanh, a well-known economist, says on the news website that the majority of people are of the opinion that the gold stock is ample and the crucial point now is how to mobilize gold from the public for stabilizing the market, according to Vnexpress. Similarly, Do Minh Phu, a gold entrepreneur, says in the discussion that if the huge resource of gold is properly mobilized, the central bank will have a huge amount of gold to regulate the market, rather than relying on imported gold.

Even gold available on the market that is not formally imported via the quota regime has not been properly put into circulation to cool down the fever due to concerns over the illegal origin of such assets, according to Tuoi Tre.

Saigon Jewelry Company (SJC) has refused to process gold not originating from quotas into gold bars bearing the brand of SJC, which is recognized as the benchmark and favored by the public, although not all such gold materials are illegal. The newspaper quoting sources say the amount of gold reduced from outdated jewelry products and from other bullion traders bearing brand names other than SJC may be as high as four tons, but SJC refuses to process such gold materials into SJC products.

For bullion traders, the blocked way creates a golden chance for them to reap profits while transferring all the risks to buyers.

As the supply is monopolized by a few traders and banks that are authorized by the central bank to import gold, these enterprises have managed to manipulate prices, keeping the differential wide between local and global prices to earn hefty profits.

The spillovers from the current policies have been highly damaging.

For the State, it is billions of U.S. dollars having been used to import as much as 20 tons of gold since early August, only to partially quench the public thirst without making any positive contribution to the economy, according to Nguoi Lao Dong. Furthermore, the gold fever also piles pressure on the foreign exchange rate and threatens macroeconomic stability while the country’s huge resources remain untapped.

For gold buyers, the damages are even more apparent as they face the loss of trillions of Vietnam dong due to paying the excessive price for gold.

For most banks, they cannot make the most of the great treasure that are staying idle in their coffers.

All such distortions on the market – including the quota regime – are attributed to the way to the flow of gold has been blocked unnecessarily. “We can stabilize the market by using the huge resources of the people… and by looking directly into gold,” says Thoi bao Kinh te Sai Gon.


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