Foreign exchange market overview

Since the start of April, the US dollar price on the free market continuously has tumbled, even some times down to below the trading forex rate of the banking system. SBV still was patient to maintain the interbank forex rate at 18,544 dong/US dollar while commercial banks did not use entire the allowable forex rate trading band, so the US dollar price was still in downtrend against the dong.

However, with a long vision from 2009 early, the dong generally has depreciated compared to the greenback.

In Q2 of 2009, the market’s foreign currency circumstance was getting tenser because a lot of enterprises did not want to sell US dollar back to banks. Free market’s US dollar price at that time jumped to 18,600 dong while commercial banks’ still was kept at 17,800 dong/US dollar, which forced SBV to expand the forex rate trading band from +/-3 percent to +/-5 percent from March 24, 2009 in order to ease the forex rate difference between free market and official market and control the foreign exchange business more closely.

After that, the foreign exchange market was stable in short time and became fiercer in late last year because of the unbalanced US dollar supply and demand, and bad news on increasing trade deficit and the decreasing US dollar reserve (under the affects of the gold price fever). Some times US dollar price was pushed to 20,000 dong and the forex rate gap between two markets was from 800 dong/US dollar in early November 2009 to 1,700 dong/US dollar in the third week of November.

Once more time, SBV had to adjust the average interbank forex rate up 5.44 percent from 17,034 dong/US dollar on November 25 to 17,961 dong/US dollar from November 26, 2009 and reduced the trading band from 5 percent to 3 percent only. Along with above decisions of SBV, prime minister issued Document 2578/TTg-NHNN requesting seven state groups and corporations to sell US dollar to the banks. Such measures helped the foreign currency market recover and come into sustainability.

On February 10, 2010, Central Bank decided to raise the average interbank forex rate by 3.36 percent from 17,961 to 18,544 dong per US dollar. Then the forex rate movements showed the very positive signals when free market’s forex rate was closer to the commercial banks’.
Currently, the forex rate of both markets fluctuates around 19,000 dong per US dollar, still representing a rise of US dollar price against late 2009.

According to the financier Bui Kien Thanh, Vietnam’s economy relies heavily on material imports. A successful processing economy is not allowed to be dependent on imports. Other countries have to devalue their currencies whereby their export products will be more competitive. But theory is not right as for a developing country like Vietnam.

In Vietnam, strategic export items such as apparel, footwear have the imported material ratio of over 80-90 percent. So, when devaluing the dong, the prices of material imports as well as the prices of products will be higher, meaning that devaluing the dong will harm the economy.

In addition, the devaluation of the dong will cause negative impacts on exports of rice, coffee, and minerals and push the CPI to high. Happily, as of the start of 2010, commercial banks could balance their foreign currency demand and supply. Since the midst of April, SBV has purchased over $1 billion from credit institutions to improve its foreign currency reserve, according to Chu Thi Viet Anh from SBV.

Sustainability of the forex rate in first four months of this year did not mean that there is no more pressure on forex rate.

Priority issues need to be cared including worries relating to CPI (reportedly, average CPI of Q1 rose by 8.51 percent year-on-year) and trade deficit (Q1 figure was posted at $3.62 billion), and the budgetary overspending (Q1 overspending of Vietnamese state was 3 percent).

Furthermore, the borrowing tendency of enterprises (who prefer taking US dollar loans to the dong) could make the economic dollarisation more serious. Generally, SBV should release stricter watch on foreign currency market to have timely support measures.

Dautunuocngoai

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