Vietnam balance of payment in 2010 may run a deficit of $4 billion, according to the 2010 socio-economic report recently announced by Ministry of Planning and Investment.
Foreign currency imbalance
This is a surprising figure, since two months ago, on July 9, the State Bank of Vietnam (SBV) officially confirmed that in the first half of 2010, Vietnam’s balance of payments was in $3.43 billion surplus, due to the surplus from foreign investments (both direct and indirect) and surplus from unilateral money transfers, etc.
Although official result of the investigation has not yet been announced, it can be confirmed that the current amount of foreign currencies kept by the people is very large, but there is no liquidity, since almost no selling has been made. Dr Le Dang Doanh, an economic specialist, emphasized that if the liquidity of foreign currencies would not be improved, the difference between supply and demand of foreign currencies might be widened, and the possibility to equilibrate the total balance of payment would then be much narrowed. The current contributions from foreign investors, and from overseas remittances, etc. would only work in short term, they are unstable and unsustainable in long-term.
Look into detail, Vietnam saw $4 billion surplus in last year’s balance of payment. However, SBV had to use $8.8 billion for exchange rate stabilisation. Where have the total $12.8 billion gone?
US dollar flows into black market
The price of dollar in black market has been lower than in official market for some times this year. However, according to Le Xuan Nghia, vice Chair of the National Financial Supervisory Committee, the main cause is the “virtual supply”.
Commercial banks have stimulated lending in foreign currencies, and firms sold foreign currencies to get dong for business purposes.
That has caused the dollar price in the black market from being higher to being lower than that in official market. By doing this, the foreign currency source in the recent months has gradually flown into the free market.
According to Nghia, large proportion of this source of capital has flown out of the foreign currency market, and become assets of the free market. This source has been accumulated for many years, so the scale of the free market has become very large. Nghia estimated that it would account for about several dozens percent of the total foreign currencies of the economy.
Therefore, it is not surprising that many firms purchased several millions of dollars in the black market at once. Buying dollars from banks is more difficult, even some firms could not buy in, or some had to buy dollars in black market, sold to banks and banks then resold to them, said Nghia.
The recent exchange rate adjustment has gained certain positive results. It has lessened the pressure to increase, stabilised the market in short-term, and increased the supply of foreign currencies.
Nghia said the prediction is just for short-term, the pressure in medium and long term remains high, due to large trade deficit, high deficit in balance of payments, the gradual decrease of “virtual supply” and the increasing demand for foreign currencies to repay banks.
Huynh The Du, lecturer of Fulbright Economics Teaching Programme said a powerful solution is needed in order to solve the deficit problem of the total balance of payment, that is to devaluate dong to a lower level. In particular, Du explained that the current exchange rate policy has caused people to expect that dong value would be lower in the future, so they feel less assured to keep dong. The psychology to keep foreign currencies has made the supply and demand relation to become more intense. On the other hand, if the value of dong increases, imports would face difficulties, the target to balance the general balance of payment would then be under more pressure.
Du dismissed the fear that keeping dong at low value would increase foreign debts or increase prices of imported goods. If the prices of imported goods increase significantly, consumers would have to consider choosing domestic products; that would stimulate domestic production. For foreign debts such as Vinashin, if converting into dong, the value would be increased, however, in fact, the corporation has to pay in foreign currencies, at the same time they also benefit from export increase. Du added that in general, each policy would have two-side affect. Nevertheless, overall, the positive effect is still clearer, and the beneficial subjects are broader, especially farmers, those are producing the main export products.
Du noted that this target is entirely achievable, if there are high political determination, well preparation of resources and points of time. There may be crowds rushing to buy foreign currencies, however, if SBV commits and satisfies the demand for foreign currency purchasing, the exchange rate would surely be stable. At that time, exports would be boosted, deficit would be lowered and foreign currency reserves would be increased, believed Du.