Sunday, 14 November 2010

Exchange rate paradox occurring only in Vietnam

Last update 05/11/2010 05:17:23 PM (GMT+7)

Exchange rate paradox occurring only in Vietnam
VietNamNet Bridge – The greenback is losing its value against most other currencies in the world, but it is appreciating against the Vietnam dong. The exchange rate paradox is harming the national economy, forcing the government to apply urgent measures to stabilize the market.
Vietnam to use reserves, won't devalue 
The urgent government’s meeting on November 3 evening ended at 9 pm. Several measures were put forward to deal with the uncertainties on the forex market and prevent high inflation.

An unscheduled press conference was convened on the morning of November 4. Le Duc Thuy, Chair of the National Finance Supervision Council was assigned by the Government to inform the press about new policies on forex management. Representatives from the State Bank of Vietnam did not appear at the conference, where a series of new decisions relating to the monetary policies and forex management were announced.

The paradox only exists in Vietnam
The dollar price on the black market has been increasing continuously over the last two weeks, far exceeding the official exchange rate. On November 3, the dollar price once soared to 21,000 dong per dollar, much higher than the ceiling price of 19,500 dong per dollar.

Meanwhile, according to Thuy, the greenback has been losing its value against nearly all other currencies in the international market. In Russia, for example, ruble, not dollar, is required in making payment because people fear that the dollar will depreciate further.

Foreign experts said that with the loosened policy currently applied by the US Federal Reserves (FED), the dollar value would decrease by 20 percent in the time to come.

As such, a paradox exists: the gold price is increasing and the dollar price is decreasing in the world, while the gold price is increasing and the dollar price is also increasing in Vietnam

Overly high dollar credit growth rate is the “culprit”

Thuy said at the press conference that all macroeconomic indexes are very “beautiful”. The GDP growth rate may reach 6.7-6.8 percent, higher than the targeted level at 6.5 percent. The trade deficit would not be as high as previously thought, about 12.5 billion at maximum. 

Therefore, the high price of the dollar is a problem which needs to be solved.

According to Thuy, earlier this year, a lot of businesses rushed to borrow money in dollars. However, the problem was that they did not use the dollar, but they sold dollars on the market, thus causing an artificially high supply on the market. As a result, at that time the dollar price decreased and sometimes was even lower than the official exchange rate.

However, after that, businesses have to buy dollars to pay back debts, leading to increasing demand and the temporarily exhausted supply.

It is clear that to some extend, there exists the imbalance in dollar supply and demand. Besides, the prediction that the inflation rate in 2010 would exceed 8 percent has also made the Vietnam dong weaker.

Dong devaluation will not occur

In current circumstances, the move that people expect from the central bank is the further devaluation of the dong. However, the government has decided that Vietnam will not devalue the dong.

The Asia Development Bank has recently advised Vietnam not to adjust the exchange rate. Government officials have all agreed that adjusting the exchange rate at this moment is not a wise move and could even have very bad consequences.

The Vietnam dong has not become so weak that it is necessary to adjust the dong/dollar exchange rate. The dong devaluation also will not be a powerful tool to help boost exports. Especially, Vietnam is expecting to see exports increase significantly this year.

If Vietnam adjusts the exchange rate at this moment then it will send the inflation rate soaring. If so, the National Finance Supervision Council has estimated that the increase in the price of goods would be double-digits or more. Meanwhile, the top priority task for now is to obtain macroeconomic stability, especially, to control inflation. If the government fails to do that, people will lose their confidence.

However, the State Bank of Vietnam will take necessary measures to cool down the forex market. It will “pump” foreign currencies into circulation to ease the situation.

The announcement has raised the concern that this could make Vietnam’s foreign currency reserves become “thinner”. However, Thuy has reassured the public that the foreign currency reserves are sufficient enough. In the long term, Vietnam needs to increase its foreign currency reserves and will so when there are more favorable conditions.

Le Khac

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