Exchange rate adjustment not yet make businesses feel assured

18-Aug-2015 Intellasia | Bao Dau Tu | 6:00 AM Print This Post

Right after China continuously devalued its currency at record level on August 11 and 12, the State Bank of Vietnam (SBV) increased the exchange rate band from +/-1 percent to +-2 percent. However, this adjustment has not been enough to help domestic businesses to cope with the “earthquake” caused by the devaluation of many currencies in the world.

*Fast and accurate decision

Regarding SBV’s move to increase the exchange rate band, most financial experts assess that it was a very fast and precise decision. That the Chinese Yuan devalued strongly on in two days August 11 and 12 not only reduces the export of Vietnamese goods to China, exacerbating the trade deficit from China into Vietnam, but also makes Vietnamese goods “lose” China and many other countries in the competition to export to Europe, the Americas.

Dr Nguyen Duc Thanh, Head of Vietnam Centre for Economic and Policy Research (VEPR) said, while the Chinese Yuan fluctuated strongly, the injection of foreign currency to stabilise exchange rate will be very costly and ineffective. Therefore, the expansion of exchange rate band allowing it to rise more sharply was a precise decision of SBV. China’s move signals that the currency war in Asia has officially started and SBV’s increase in exchange rate adjustment amplitude was reasonable.

Agreeing with this opinion, many bank experts said, on August 11, a series of Vietnam’s rival countries such as Thailand, Singapore, the Philippines, South Korea, etc. have also devalued their domestic currencies. If Vietnam does not devalue dong, it will make the domestic currency become more expensive than other countries, reducing the competitive advantage.

Another reason making SBV to loosen the exchange rate adjustment margin is to prevent the trade deficit from exacerbating because, if the trade deficit increases strongly, the exchange rate will suffer from pressure again.

In spite of supporting SBV’s exchange rate band expansion, many economic experts suppose that this is only a temporary glass of water to quench the thirst. From now till the end of the year, the pressure on exchange rate in our country still remains high, especially when the US Federal Reserve (Fed) increases interest rates and many other countries continue to devalue the domestic currency.

As per SBV’s commitment, in 2015, it will only adjust the exchange rate by maximum two percent and the room for adjustment has run out. That SBV loosens the exchange rate band to +-2 percent can be considered as a way to increase exchange rate. In the current context, SBV’s flexibility is supported by the market but the issue is, from now till the end of the year, how will the possibility to stabilise the exchange rate be like?

With the forex reserves at about $40 billion (including gold) and many administrative tools, SBV is able to intervene in the market. However, experts suppose that this figure is not large and the maximum level of intervention should only be about $5 billion. The usage of administrative measures, though effective, is non-market. Therefore, SBV needs to consider fluctuations of world currencies to continue adjusting exchange rates accordingly in order to support export and reduce trade deficit.

Currently, many of our country’s agricultural products are exported to the China market such as cassava, dragon, rice, rubber, cashew, etc. Phan Van Sinh, Chair of the Board of director of Quang Tri Trading Corporation (Sepon Group) said, the Chinese Yuan devaluation significantly affects the company’s cassava export to China as it will make the price become expensive. “Currently, we still do not know how to calculate. Maybe we will negotiate with farmers to reduce slightly the price of raw materials while negotiating with import partner from China so that the two sides can share the disadvantages.

Similarly, a rubber business also expressed concerns that in the context that the rubber export is facing difficulties when the Chinese Yuan devalues, the price of Vietnamese rubber exported to this market will surely increase, and certainly, Chinese importers will return to force domestic businesses to discount further.

With many businesses that export to markets whose payment is made in US dollars, though, the exchange rate has increase two percent since the beginning of the year, they still suppose it as low. Exchange rate was one of the main reasons for our country’s agricultural export to fall strongly in the first seven months of this year. Many businesses propose that, SBV needs to consider the possibility of increasing exchange rate to support export.


Category: Finance, Vietnam

Print This Post

Comments are closed.