Forces put squeeze on forex rate

Higher gold prices and maturing US dollar loans are pressuring the dong/US dollar exchange rate.
The market last week witnessed an upward trend in the average interbank exchange rate set by the State Bank. After a stable 20,628 dong per US dolar rate during September, the rate started to rise to 20,638 on October 5, and to 20,648 and 20,653 on the following days, respectively.

This puts the rate close to the increase limit of 1 per cent targeted by State Bank governor Nguyen Van Binh to keep the exchange rate stable towards the year’s end.

Large banks including Vietcombank, Eximbank, ACB and BIDV simultaneously raised the selling price of US dollar from 20,834 to 20,844 dong on October 5, and to 20,854 and 20,860 dong on the next days.

According to banking experts, this trend could continue until the end of the year when dollar loans mature, especially given the fact that the dollar credit growth has been much higher than the dong credit growth since the beginning of this year.

State Bank figures show that dollar credit in the first three weeks of August increased by 0.82 per cent month-on-month. In contrast, dong credit was down 1.05 per cent during the period.

A gap between the dong and dollar lending rate of around 10-12 per cent prompted enterprises to opt for dollar borrowing.

Banking expert Dr. Nguyen Tri Hieu said by the year’s end enterprises would need dollars to pay off dollar denominated debts which had grown massively in the first half of this year.

“This will influence the exchange rate when demand for dollars exceeds supply at the end of the year,” said Hieu

Vietinbank Securities deputy director Do Linh Phuong said the exchange rate could rise at the end of the year if it was under pressure from dollar credit. Phuong forecasted the interbank exchange rate could hit 21,000 dong per US dollar at the year’s end.

But the State Bank confirmed credit institutions’ foreign currency deposits at the State Bank were still on the rise, ensuring the banking system’s foreign currency liquidity.

In September, levels of foreign currency deposited at the State Bank increased 45.1 per cent month-on-month, equal to an additional $586 million. Meanwhile, the foreign currency mobilisation of credit institutions was up by 0.07 per cent month-on-month, equalling $17 million.

Vietinbank deputy director Le Duc Tho said there was enough USD liquidity for the economy and the exchange rate depended on gold prices. “The fluctuation in gold prices and the State Bank’s recent permission on import of gold are the prominent factors firing up the exchange rate,” he said.

Hieu agreed, adding that the climbing gold prices would lead to dong depreciation against the dollar, especially if inflation reached 18-19 per cent at the end of the year.

On September 19, the State Bank approved the import of four tonnes of gold for gold trading enterprises. This move was part of a bid to reduce the huge price gap of around 2-3 million dong/tael ($96-145/1.2 ounces) between domestic and international gold price in recent weeks. A week later the bank again announced it would import gold if necessary and expressed its determination to stabilise the gold price. – VIR

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