Dong pushed for depreciation
Source: 13-MAY-2008 Intellasia | Vietnam Investment Reviews page 15
May 13, 2008 - 7:00:00 AM The State Bank is managing the dong to depreciate against the greenback to prevent possible hot money flows with hoarding purposes.

Over the last few weeks, the dong has been turning back to its tendency of depreciating against the US dollar as greenback shortage spreading over the banking system.

In a 'directive' move, the State Bank has been raising its daily official dong /US$ exchange rate which the local banks are allowed to trade 1% either sides. By May 8, the State Bank's rate has been lifted to dong 15,894/US$ pushing commercial banks' average trading rate to dong 16,144/US$ while on the black market it was dong 16,200/US$, much dong 15,800/US$ level just four weeks ago.

"The movement reflects the market greenback scarcity but this is in State Bank's wish not letting the local currency appreciate against dollar as an impediment to possible short-term speculative foreign money inflows," said a State Bank source.

Over the last four weeks, the State Bank has sold around US$1.3 billion to serve local banks' demand.

The State Bank source said the interest rate gap between local market and international markets coupling with local currency appreciation could trigger a short-term speculative foreign capital inflow. "Thus, managing the dong appreciate could partly reduce the risk."

At the moment, while mobilising rate for dollar in international markets stands around 2-3%/year, the interest rates in Vietnam for dollar deposits and local currency deposits are around 6 and 12%/year respectively. Additionally, from late 2007 to March 2008, the dong had gradually appreciated against the US dollar.

When foreign portfolio capital inflows enter Vietnam, they would be converted into local currency for depositing in banking system until foreign investors make transactions. In case the money is pulled out before investments are made, the investors could enjoy 'double margin', namely banking interest rate and exchange rate gap as local currency appreciated.

According to Tai Hui, Standard Chartered Southeast Asia regional head of economic research, the recent capital flow suggests dong depreciation pressure has increased.

And given Vietnam's relatively modest foreign exchange reserve, a steady local currency, or very gradual and orderly depreciation, could be the most appropriate response for now," said Tai Hui. According to unofficial figure, Vietnam's foreign currency reserve is now around US$22 billion.

Tai Hui added that it seems that the central bank has moved away from currency appreciation policy to help curb inflation to currency depreciation policy to support local exporters.

The State Bank source said that exchange rate management was putting the bank on dilemma. Currency appreciation would help reduce import inflation while currency gradual appreciation would assist exporters by making Vietnamese products relatively cheaper than other countries.