Exchange-rate policy more transparent, VinaCapital says

Vietnam’s variation of the dong’s reference rate each day since it devalued the currency is evidence of a more transparent exchange-rate policy, according to VinaCapital Investment Management Ltd.

The reference rate was set today at 20,683 per dollar and has been fixed at a different level each day since the dong was devalued by 7% on Feb. 11. Prior to that, the rate had been set at 18,932 since August. The official exchange rate is now allowed to fluctuate up to 1% on either side of the fixing, compared with 3% previously.

The changes are the first major policy initiatives by the State Bank of Vietnam’s incoming management team, which is dominated by technocrats, wrote VinaCapital chief economist Alan Pham in a research note released yesterday.

The narrower trading band suggests the central bank will be “more proactive” in managing the dong as well as the economy as a whole, wrote DWS Vietnam Fund Ltd., which is managed by Deutsche Asset Management Asia) Ltd., in a note released Feb. 14.

“The exchange rate is going to be adjusted flexibly and incrementally, in response to market situations,” wrote Pham. “Transparency and openness in policy-making is an effective antidote to market uncertainty, and a reassurance to the local as well as foreign investing communities.”

The dong declined 0.8% to 20,895 per dollar as of 12:51 p.m. in Hanoi, according to prices from banks compiled by Bloomberg. On the unofficial market, the dong traded at 22,000 per dollar, compared with 21,550 on Feb. 11, according to a telephone information service run by state-owned Vietnam Posts & Telecommunications.

The weakening of the dong on the black market since the devaluation points to “continued pressures” on the currency, Pham wrote. “Further steps to lower demand by tightening monetary policy and improving the fiscal management and efficiency of large state-owned enterprises are needed.”- Bloomberg

Tags: exchange rates