Exchange rate may get tense by year-end, economist says

The dong/US dollar exchange rate is likely to get tense by the end of this year, VietBiz24.com quoted Dr. Pham Do Chi, a top economist of Star Plus Institute on Monday September 26.
The exchange rate on the market has begun to show signs of stress when preparing to step into the last months.

The US dollar price on the free market last weekend increased by nearly 300 dong compared with the end of the previous week as the bid and asks price stood at 21,220 and 21,300 dong/dollar.

Meanwhile, the dollar price in banks was stable at 20,834 dong/US dollar (ask) because the State Bank of Vietnam continuously kept the average inter-bank exchange rate at 20,628 dong/US dollar.

According to Dr. Chi, the difference between deposit and lending in foreign currencies in the first seven months of this year has climbed to more than 150 trillion dong, equivalent to US$7.3 billion.

Dr. Chi explained the high difference between deposit and lending in foreign currencies was because several businesses and banks have been taking advantage of the difference between the interest rate for dong and US dollar to make carry trade operations. This is an activity in which investors sell a specific foreign currency with relatively low lending interest rates and use the proceeds to buy other currencies with a ratio of relatively high interest rates to make profits even if they do not really need foreign currency for payment.

This is a main cause creating a virtual supply of dollars to help stabilize the exchange rate in the months (from March to July) and this will also be pressure on the exchange rate at year-end.

Dr. Chi commented: “The overall balance of payments surplus in 2011 may still be negative (US$1-2 billion by the end of this year) due to the trade deficit forecasted at US$13-14 billion even though the foreign exchange reserves have improved”.

Dr. Nguyen Duc Thanh, director of Vietnam Centre for Economic and Policy Research (VEPR) said that there are many possibilities that a large trade deficit will be announced in the last months, which will activate the exchange rate shock. “To deal with this situation, the central bank will either have to sell dollars to stabilize the forex market or accept to dump US dollars, or make a combination of both as it did in the first period of 2011,” Thanh said.

Source: Vietbiz24.com

Tags: Vietnam banking industry, Vietnam finance, Vietnam financial, Vietnam forex market