Pressure on exchange rate may increase

The free exchange rate of US dollar and dong has started to rise since the end of last week to around 19,190 dong per dollar (buying) and 19,220 (selling) and remained nearly flat till July 26, slightly up by 20 dong per dollar compared to mid of last week. However, banks have not changed US dollar buying and selling prices.

However, businesses could not buy US dollar at the price listed in banks even though the price is at the highest allowed level, which is 19,100 dong. Representative of an import company said they have to pay extra 40 to 100 dong per dollar to purchase dollars from both state-own and joint stock ones.

A manager of a transaction office in a major state-owned bank also confirmed this. He added that although many exporters have commitment to sell foreign currencies to banks, when they received US dollars ahead of time of the payment, they do not sell to banks since they hope the price of US dollar could rise later.

Meanwhile, banks have to buy foreign currencies from other businesses at high price. Therefore, they have to sell at the higher price than the listing one.

The manager also said that banks have many ways to increase foreign currencies’ buying and selling prices to businesses without charging additional fee, since the State Bank has banned this. One common way is to adjust deposit rates or lending rates offered to companies.

Nevertheless, the foreign currencies’ supply of banks is currently not too tight, if businesses are willing to buy at high prices, they will be accepted immediately. Otherwise, they have to wait. This is unlike the situation in the beginning of last year, when there was no supply even if businesses agreed to buy at high prices.

Demand for US dollars is forecast to increase in the last months of the year, and thus the pressure on exchange rate would increase further. The manager also said demand for foreign currencies to import raw materials have started to increase.

Meanwhile, Bank of East Asia’s deputy general director Nguyen Thi Ngoc Van said that according to economic cycle, demand for foreign currencies is usually higher at the end of the year than in the early months of the year. This is because there are a number of foreign organisations converting profit into US dollars to send to their countries, in addition to the companies that purchase foreign currencies for payment purposes.

In a seminar in Hochiminh city held in last week, general director of ANZ Vietnam Dam Bich Thuy said the difference between lending rate in dong and US dollar remains high, being at about seven to eight percent, thus putting pressure on exchange rate when many firms still want to borrow foreign currencies. If those companies do not have revenues in foreign currencies, when the loans become due, they have to buy in, leading to an increase in demand for foreign currencies.

If in the near future the State Bank succeeded in reducing lending rate in dong, it is expected that businesses would tend to shift to borrow US instead of dong. Before shifting, they have to purchase dollars to clear all the current debts. This also puts pressure on exchange rate, added Thuy

President of the National Financial Supervisory Commission Le Duc Thuy shared the same point of view with ANZ general director Thuy. Thuy said in the recent time, many businesses have borrowed loans in foreign currencies and then sold to banks, leading to an artificial supply increase and later a decrease in exchange rate. However, in the near future, when businesses want to buy foreign currencies to repay their debts, pressure on exchange rate would be created. Thuy added that there would definitely be pressure, and that pressure has already been created.

The pressure is low or high depends on the intervention of State Bank to regulate and keep exchange rates stable. Only when the State Bank has settled the issue on dong interest rate, exchange rate problem would then be solved, Thuy said.

Tags: Vietnam finance, Vietnam financial, Vietnam foreign currency market

Posted by VBN on Jul 28 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