Currency depreciation a pre-emptive move

The currency depreciation move before Tet surprised the banking community, but demonstrated innovative monetary management.

On February 10, 2010, four days before traditional Tet holiday, authorities shifted its US dollar-Vietnamese dong mid-point reference rate upward by 3.4 per cent from VND17,941 to VND18,544 per dollar, which allowed the spot rate to trade as high as VND19,100, the new band ceiling.

In Vietnam, local banks are currently allowed to trade dollars within 3 per cent either side of the State Bank’s mid-point reference rate. According to a Vietcombank source, the central bank’s currency depreciation was seen as a pre-emptive move.

“In fact, I expected currency depreciations from June, 2010, not in February because greenback supplies are not that short. This, together with setting a super-low cap on dollar deposit interest rates, forces enterprises to sell their greenback holdings to banks, providing sizable dollar supplies for the banking system,” said the Vietcombank official.

In the past, the authority normally conducted currency depreciations when the economy was under dollar shortage pressures. The nearest change was made in late November, 2009 by adjusting upward mid-point reference rate by 5 per cent. In February, the State Bank also announced that onshore greenback deposit rates for corporates would be capped at 1 per cent per year, relatively low from the previous 4-5 per cent, per year level.

HSBC’s foreign exchange strategist Daniel Hui said the move discouraged dollar hoarding by increasing the net carry cost of holdings. Interest rates for dollar deposits were capped at 1 per cent, per year while current deposit rates for Vietnam dong are around 11-12 per cent, per year.

Hui said dollar hoarding was a significant cause of depreciation pressure. “We viewed these expectations as being primarily driven by domestic monetary policy that has been too loose rather than being primarily a speculative problem. However, in our view, the lower dollar deposit rates, without other policy moves to tighten domestic conditions will do little to alter these expectations or the desire to accumulate and hold dollar,” Hui added.

Nguyen Thi Kim Thanh, head of Banking Development Institute, said: “These moves will certainly force corporates to sell their dollar holdings under deposit accounts as interest rate difference is now over 10 per cent per year, a considerable level.”

In February, the State Bank said that total corporate dollar deposits in the banking system totalled $9 billion.

Tags: Vietnam banking, Vietnam currency, Vietnam finance, Vietnam finance news

Posted by VBN on Mar 8 2010. Filed under Banking-Finance. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry