Vietnam central bank pledges stable exchange rate

by lexie Mon Oct 10, 2011 12:39 pm

October 10, 2011

Vietnam central bank pledges stable exchange rate

The State Bank of Vietnam said it will keep the exchange rate stable, even as the dong has showed signs of weakening due to increasing dollar purchases for import and debt payments.

The central bank said last week it aims to keep the rate stable until the end of the year, preventing a rise of more than 1 percent. It also ordered commercial lenders to control lending in foreign currencies.

The central bank lowered its daily reference rate to 20,648 per dollar on Thursday, down from 20,638 on Wednesday. The move was the second rate cut in a row after the mid-point was lowered from 20,628 on Tuesday.

The rate had been left unchanged since August 24.

Following the adjustments, the dong dropped on both the official and the so-called black market. Vietcombank quoted the dollar at VND20,860 on Sunday, compared to 20,834 a month ago.

A major gold trader in Hanoi said recent fluctuations on the gold market added a lot of pressure on the exchange rate. He said Vietnam spent US$1.5 billion to import gold in the first nine months. The country imported about $600 million in gold in September alone.

“Gold importers no longer have an ample supply of dollars. Some have to buy dollars at unofficial rates of up to VND21,000 per dollar,” he said.

An expert speaking on the condition of anonymity said the monetary authority was trying to boost confidence in the dong as pressures on the exchange rate are mounting. Even without the rising dollar demand for imports, a large amount of dollar loans was enough to have a strong impact on the foreign exchange market, he said.

The development on the forex market came after the dong stayed in a comfort zone for months.

The Asian Development Bank said in September that stabilization of the dong exchange rate was achieved by a combination of tighter monetary policy, a large one-step devaluation of the currency in February, caps on US dollar deposit interest rates, and other administrative measures to limit the use of gold and foreign currency.

However, the bank warned that the dong could come under downward pressure when short-term dollar loans mature.

According to the central bank, dong loans rose 6.94 percent this year through the end of August. Loans in foreign currencies, on the other hand, expanded by 21.79 percent over the same period.

Tran Bac Ha, chairman of the Bank for Investment & Development of Vietnam, said the central bank’s commitment to keeping the dong stable could buoy market sentiment. However, Ha said he’s worried about the high growth rate of dollar loans.

Truong Van Phuoc, general director of Eximbank, said an imbalance between dollar loans and deposits would put pressure on the dong.

It will not be easy to anchor the exchange rate when the country’s trade deficit is still large, he added.

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