Weaker dollar feeds growing trade deficit

The State Bank of Viet Nam has taken a controversial series of tough measures to reduce the dollarisation of the economy, regain control of unstable foreign exchange markets and ease the downward pressure on the value of the Vietnamese dong.

“The recent series of measures aim to control foreign reserves and ease tensions on forex market,” says SBV Governor Nguyen Van Giau. Forex policy was being managed with an eye to market supply and demand and the trade balance, Giau added.

Together, however, the measures raise a larger question of how much weaker the US dollar should be in balance with the national priority of building an export-oriented economy.

The SBV recently tightened the cap on interest rates commercial banks were able to pay on US dollar deposits to 0.5-2 per cent per year. It also told State-owned enterprises to sell foreign reserves to the commercial banking system starting next month; and raised the compulsory reserves at credit institutions from 6 per cent to 7 per cent.

The series of actions was expected to ease further downward pressures on the value of the Vietnamese dong as well as enrich dwindling foreign reserves, estimated earlier this year at US$12.2 billion – or nine import weeks – from a high of nearly $24 billion in late 2008.

The average forex rate yesterday remained at VND20,618 per dollar, the level it has held since last Friday and the lowest level since the devaluation of the dong back on February 11. However, the dong has remained fairly stable overall in recent weaks, peaking at VND20,733 per dollar on April 19.

A stabilised currency market allowed the SBV to buy up $1.2 billion in May for the nation’s foreign exchange reserves.

As of June 15, US dollar deposits in the commercial banking system totalled $24 billion, including $13 billion in institutional deposits and $11 billion in individual deposits.

The central bank has been buying up around $276 million per day from commercial banks in recent days, according to an SBV report.

However, Vietinbank chairman Pham Huy Hung this week told reporters that the SBV should not further tamper with the forex rate.

“The forex rate has seen positive evolution, although foreign currency credit growth is quite hot,” Hung said. “That is worrisome for the future, as it may also affect the country’s trade deficit. In addition, the difference between lending and mobilisation of foreign currency will lead to difficulties for banks in the future.”

The nation’s trade deficit in May was estimated at about $1.7 billion, the highest since January 2010, bringing the deficit so far this year to $6.59 billion.

Economist Pham Do Chi said that if the dollar continued following its current downtrend, the trade deficit might hit $16 billion this year.

“The central bank’s forex policy package has stabilised the US dollar exchange rate, but the Vietnamese dong is still under strong pressure to depreciate in this context of the economy,” said the deputy head of the Central Institute for Economic Management, Vo Tri Thanh.

“If the dollar is illusionally over-weakened, the trade deficit will increase. However, when the exchange rate is still far from VND20,000 per dollar, we should not be too worried,” Thanh said. — VNS

Tags: Vietnam trade, Vietnam trade deficit 2011