Scarce dollar strains Vietnam currency market

Scarce dollar strains Vietnam currency market

 

 

Last updated: Sunday, October 4, 2009 |
VnnNews - Vietnam is facing a dollar shortage as a result of lackluster capital inflows this year, experts say.

 

 

VnnNews - Vietnam is facing a dollar shortage as a result of lackluster capital inflows this year, experts say, calling for adjustments to the exchange rate to ease the strain on the local currency market.

The foreign currency supply this year, for the first time, has fallen short of demand and the central bank had to sell part of its dollar reserves to ease the shortage, Le Duc Thuy, a former central bank governor, said in an interview published by the weekly Saigon Economic Times in mid September.

 

Although imports fell, the decline in exports and capital inflows was even greater, said Thuy, who is now chairman of the National Finance Supervision Committee.

 

A senior official at ANZ Vietnam, who is not authorized to speak on record, told Thanh Nien Weekly that foreign investments and overseas remittances have helped keep Vietnam’s balance of payment in check. But this year “we see a reduction in all of those sources due to the global crisis and the collapse of the stock market,” he said.

• Foreign direct investment inflows into Vietnam dropped 11 percent to US$7.2 billion in the first nine months of this year from a year ago.
• Meanwhile, overseas remittances are forecast to fall to $6.8 billion this year, compared to $8 billion in 2008.

 

“From a microeconomic standpoint, businesses – especially exporters – are reluctant to sell dollars to banks in hope that their dollars will be worth more,” the ANZ official said.

 

“These factors combined lead to the scarcity of dollars for payment in the market… The increase of the dong/dollar rate reflects this scarcity.”

 

The dong has weakened about 2 percent this year against the dollar and touched a record low of VND17,862 on July 23, according to Bloomberg data.

 

“The currency market is now under strain,” Thuy said. “Businesses have difficulties in currency trading. Those who have foreign money don’t want to sell it while those in need of foreign exchange can’t buy it.”

 

Many businesses that needed dollars chose to take dong loans to benefit from a government rate subsidy package. They then bought dollars, Thuy said.

 

If businesses had just borrowed in dollars, they would not have put any pressure on the currency market, he said.

 

An increase in dollar borrowings could partially lessen the pressure on the exchange rate because businesses would have more dollars to settle payments, the official at ANZ said.

 

“It is important to note that while dollars for payment are quite scarce, dollars for lending, on the other hand, are rather sufficient. This is because banks are only allowed to lend the dollars from their customers’ [deposit] accounts, but not sell them.”

 

Exchange rate

 

Nguyen Khac Quoc Bao, a professor at the Ho Chi Minh City University of Economics, said in a telephone interview on Tuesday that the current pressure on the dong/dollar rate can be explained mainly by psychological factors.

 

Many people fear inflation will not ease and the dollar will gain value against the dong, and this prompts them to move their assets out of the dong and place it on the dollar, he said.

 

However, Bao said he expects the pressure on the currency market may ease soon as the central bank is likely to step in and adjust the exchange rate slightly.

 

The first good sign on the market may have emerged already. The central bank said in a weekly report on its website last Friday that local exporters have started increasing sales of dollars to commercial banks, helping ease the dollar shortage.

 

A banker told Reuters Monday that the central bank’s pledge to keep the dong stable has calmed businesses, especially exporters, and encouraged them to sell their dollar earnings.

 

The central bank had sufficient dollar reserves to intervene in the market when necessary, but the question is whether the bank needed to do so or not, Thuy said in the interview with the Saigon Economic Times.

 

“I think an adjustment in the official exchange rate is enough to keep supply and demand in balance, without the need for government intervention.” (Vietnam recently devalued its Dong)

 

An experience gained from the past is that dollar prices in the unofficial market should be kept within VND100 above the rates in banks, Thuy noted. “There will be problems if the gap is more than VND100.”

 

With a gap of VND500, for instance, a firm selling $1 million to a bank would earn VND500 million ($28,026) less than what they could from the unofficial market, he said, pointing out that this difference is enough for a medium-sized firm to pay salaries for several months.

 

VietNamNet/Thanh Nien

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