SBV adjustment applauded by Goldman Sachs, IMF

International organizations have released reports lauding the decision by the State Bank of Vietnam (SBV) to adjust the dong/dollar rate and basic interest rate, right after SBV released the decision.

The International Monetary Fund (IMF) considers the move by SBV to be a positive signal about the government’s determination to tackle macroeconomic risks.

“I think the decisions that they have announced … signal that they have decided to tackle the emerging macroeconomic risks that they were facing, and I think that’s positive,” observed Benedict Bingham, the IMF’s senior resident representative, as quoted by Reuters

Meanwhile, US Goldman Sachs also believes that the intervention was necessary. The November 25 report by Goldman Sachs, released the same day made its decision, offered three major conclusions.

First, Goldman Sachs averred that raising the basic interest rate is important to help control risks caused by rapid development and inflation, the two emerging problems of Vietnam’s economy.

The fact that SBV raised the basic interest rate is evidence that Vietnamese policy makers are now wary and are determined to take the necessary steps to prevent risks.

In addition, the basic interest rate will improve the attractiveness of the local currency, which will in turn stabilize the dong/dollar exchange rate.

Second, the adjustment of the dong/dollar rate has been attributed by Goldman Sachs to the payment balance deficit and foreign currency reserves problems in Vietnam.

Third, regarding the narrowed exchange rate trading band, the Goldman Sachs’ report argued that this is an effort by SBV to slow the decrease in the value of dong against the dollar.

Goldman Sachs also asserted that once the Government asks state-owned corporations to sell foreign currencies that they earn from exports to SBV, they will succeed in assisting the central bank efforts to protect the local currency from devaluation.

Dau Tu Chung Khoan newspaper, citing Standard Chartered Bank’s updated report on Vietnam’s economy, revealed that the basic interest rate will make the local currency become more attractive and ease worries about dong price decreases. Investors would tend to hoard VND more than the dollar because of the higher interest rate, thus easing the pressure on the dollar supply.

According to Standard Chartered Bank, Vietnam’s foreign currency reserves are about 16 billion dollars, a fall from 20.3 billion in June 2009.

Explaining the decline in foreign currency reserves, the bank cited the decrease in overseas remittances and direct foreign investment. Overseas remittances are forecast to drop by 20 percent to 5.8 billion dollars in 2009. A 2010 reversal would help ease the pressure on the international payment balance.

The Government is seeking US dollar loans from the World Bank, other Asian economies and the Asian Development Bank. Vietnam has borrowed $500 million from ADB and is seeking a loan worth one billion dollars from the World Bank.

Regarding Vietnam’s national economy’s prospects in the future, Standard Chartered Bank maintains that the current trade deficit of Vietnam is not a serious concern.

VietNamNet/DTCK, DT, TBKTVN

Tags: SBV, vietnam bank, Vietnam finance news