Government needs to be cautious in widening dong/US dollar trading band
The dong/US dollar forex rate in the free market as well as commercial banks now is relatively stable after State Bank of Vietnam (SBV) widened the forex rate trading amplitude (or trading band) from +/-2% to +/-3%. Yesterday, the listed forex rate of commercial banks was down by 10 dong/US dollar to 16,960-19,976 dong/US dollar compared with late last week. Meanwhile, the interbank average forex rate was kept at 16,482 dong/US dollar and that of the free market was 17,350 dong/US dollar with considerable number of transactions.
However, some sources said that in order to support exports in the current context the widened trading band aims to help make the dong/US dollar forex rate more flexible. Compared with the third quarter of 2008, the listed forex rate of commercial banks now is close to the threshold of 17,000 dong/US dollar, which is good for export activities. However, according to Nguyen Duc Hoan-chair of the HCM City Association of Garment and Textile Embroidery and Knitting (Agtek), the current forex rate has not been able to offset enterprises’ difficulties.
Jonathan Pincus, chief economist at the United Nations in Hanoi said that if the Vietnamese government continues widening the forex rate trading band, it will support exports considerably. To gain benefits, Vietnam should be cautious and prudential while adjusting the forex rate trading amplitude.
Factually, the forex rate trading band is the allowable ceiling and floor of dong/US dollar forex rate against SBV’s announced level. Widening the trading band could make the forex rate surge or decrease strongly.
At the sidelines of “Vietnamese economy before global financial crisis” conference held on November 18 in HCM City, Dr Prof Tran Ngoc Tho, head of HCM City Economic University’s Corporate Finance Department stated that with the policy of supporting exports in the unstable global economy context, the forex rate trading band could be increased further with a more cautious attitude. In his opinion, the competitive strength of Vietnamese export items remains limited. However, a surge in the forex rate will affect strongly the companies that have foreign debts and currently Vietnam does not have a good forex rate insurance service. Eximbank did have a forex rate insurance product but there are not many customers because of the high price for services.
From now to the year end, the forex rate needs to be stabilised to avoid sudden movements in the foreign currency market. Because higher forex rate will create heavier pressure on FDI, he added.
Having the same point of view, Ho Huu Hanh, director of SBV—HCM City arm emphasized that in the current situation further widening the trading band for the dong/US dollar forex rate could support exporters partially and curb trade deficit but the state will have to suffer financial burden of foreign debts.
Category: Finance
