Dong strengthens against greenback
Source: 27-MAR-2008 Intellasia | 25/Mar/2008 Thoi Bao Kinh Te Vietnam
Mar 27, 2008 - 7:00:00 AM Based on the average forex trading rate between dong and US dollar in the interbank foreign currency market daily announced by the State Bank of Vietnam, dong still lost 229 dong against US dollar in 2006 or 1.44% while dong depreciated by only 13 dong against US dollar in 2007 or 0.08%.

However, since the start of this year, the forex rate has moved differently because from December 31, 2007 to March 20, dong jumped by up to 124 dong against US dollar or 0.77%. Particularly, within the first 17 days of march, dong appreciated by only 26 dong however on three consecutive days of 18, 19 and 30, dong appreciated by another five, ten and fifteen dong against US dollar respectively in addition to the previous 26 dong.

Thus, amidst the massive foreign currency flows into Vietnam from different channels, although the forex trading band has been twice expanded from +/-0,5% to +/-0,75% by early this year and to +/-1% as of March 10 and the average forex trading rate in the interbank market announced by the central bank by early this year was 16,112 dong a US dollar and 16,025 dong a US dollar as of March 10, the playing field for commercial banks seemed to be still narrow.

On recent days, when the forex trading rate in the free market was only some 15,500 dong a US dollar or even lower, the forex rate at banks could not catch up with the market price.

This is the reason for the Vietnam Association for Financial Investors (VAFI), as well as a series of experts said that it is necessary to expand the forex trading band to 3-4%, even 5% in order to prevent commercial banks from violating the trading band by collecting service charges or switching to by other foreign currencies.

All above things also mean that in order to catch up with the market, in addition to continue pushing the average forex trading rate in the interbank market, it is necessary to expand the forex trading band.

Nevertheless, such a way is too strong for Vietnam. This view is based on the major evidences as below:

Firstly, expanding the forex trading band likes a big brake, which make exports of Vietnam not only slow down but also stop forever. According to recent statistics from the Ministry of Industry and Trade, in order to reach the target of nearly US$60 billion in exports this year, the country must attain monthly export of US$5 billion on average however export in this quarter is estimated at only over US$13 billion.

That means export is increasingly slowdown. Thus, once the forex trading band is expanded too widely as some proposed, perhaps exporters will have to stop their contracts.

Secondly, meanwhile, import will be enhanced and report all time high trade deficit.

Namely, according to the Ministry of Industry and Trade, import leapt from US$5 billion in January to US$8.2 billion in February and reached US$7.3 in March, bringing total import spending to US$20.5 billion, jumping by up to 68.7% and tripling the export growth. At the same time, trade deficit rose by up to 56.2%. Surely, the unexpected growth of import was resulted from impacts of the three factors: firstly, the two familiar factors appearing from 2007, highly increasing demand for goods import and continued hot prices, have pushed import by another 39.6%, the new factor, forex trading rate and wider forex trading band, has made import prices cheaper, creating impetus for import and pushing trade deficit.

Thirdly, the two contradictory trends have led to sharp decrease of the economy because that export slowdowns or may stop means that a series of businesses have to scale down their production or may shut down and that import continues strongly growing means that a series of businesses producing goods to serve the domestic market have to narrow production or even close.

This also means that once the forex trading band is expanded too widely, this will surely be the major factor making us hard to realise the economic growth target.

All above ideas mean that although appreciating dong is an obvious trend, such important event requires step-by-step moves so that the economy has enough time to adapt it.