State Bank keeps tight lid on forex rates
15:50\' 21/12/2007 (GMT+7)
VietNamNet Bridge – The US dollar has remained weakened internationally since September, and the Vietnamese dong, its foreign exchange rates largely pegged to the value of the greenback, has been under strong pressure to appreciate despite Government efforts to keep it in check.
Economists are expressing doubts over the State Bank of Viet Nam’s long-term ability to stabilise the dong.
HSBC economist Prakriti Sofat, in a November 29 report, said, "Double digit inflation and the risk of [inflation] in the teens suggest that it’s only a matter of time before the central bank gives up its policy on dong appreciation."
Yesterday, the central bank announced a daily inter-bank exchange rate of VND16,114 to the dollar, while Vietcombank was listing an exchange rate of VND16,033/16,053. By comparison, Vietcombank offered rates VND16,215/16,248 on September 6.
Vietnamese banks are not allowed to set exchange rates beyond a 0.5% band above or below the State Bank daily rate, which has barely budged since the beginning of this year, despite the dollars plunge against other worldwide currencies, from the euro to the yen to the Thai baht.
The pressure can be seen on the street market in currency, where gold shops were quoting the greenback at VND16,040/16,060 yesterday, much lower than the official rate.
"If Vietnam continues keeping its nominal exchange rate artificially stable, we will pay the price when importing goods. Domestic prices will surely face the danger of increasing," Vo Tri Thanh, a senior economist with the Central Institute for Economic Management, told Viet Nam News.
The State Bank finds itself stuck between the need to curb inflation and the need to promote exports and keep the exchange rate stable against strong capital inflows from offshore.
"A conscious effort by the Government and the central bank to tighten monetary supply to curb inflation pressure seems in the cards. I suggest the State Bank choose to keep local liquidity tight in 2008, limiting intervention in the USD/VND market," wrote Standard Chartered Bank economist Tai Hui in late November.
Sure enough, the central bank has bought up dollars and tried to manage the supply of dong in circulation by issuing bonds and through regulations requiring commercial banks to increase compulsory reserves, improving their risk management but also sopping up excess liquidity.
While the State Bank has the power to keep the nominal exchange rate stable, real exchange rates are another matter. The real exchange rate can be viewed as the nominal exchange rate - domestic inflation + external inflation. It comes into play in what exporters and importers pay in cross-border transactions.
"Obviously, there is confusion between exchange rate and monetary policy," Thanh said. "If the State Bank allowed a flexible nominal exchange rate, it would be much better, I think."
It would allow, the central bank as well as the Government to pay more attention to reigning in inflation instead of exchange rate stability, he added.
"It would be OK if Vietnam manages growth rates of around 8-8.5%."
If the State were to let the dong appreciate by 1% versus the US dollar, it could temper inflation by 0.6-1 percentage points over a 12-month period, according to HSBC regression analysis.
Such a slight appreciation would not harm import or exports at all, Thanh added.
The appreciation is predicted to only affect competitiveness slightly on the US market but not to European or Japanese markets where currencies have already appreciated against the dollar.
Deposit interest rates
The wide gap between interest rate offered by domestic banks on US dollar deposits and those offered on dong deposits has also continued to widen.
The one year dong deposits earn an interest of 10%, while US dollar denominated deposits are paid only 5.5% for the period of one year.
"There’s a serious problem here in the interest inconsistency between dong and dollar," Thanh said.
Commercial banks are struggling to retain customers by keeping interest rates above the inflation rate, Techcombank chairman Nguyen Thieu Quang suggested.
Total capital mobilised by commercial banks and credit institutions in Hanoi has reached VND341.7bil (US$21.35mil) in the first 11 months of this year, up 36% over the same period last year, and the number has increased by 55% in HCM City, according to the Viet Nam Banking Association.
"The haste of local banks to raise deposit interest rates is really a double-edge sword which not only impacts badly on inflation but also on the banks themselves," said VNBA representative Cao Viet Loi.
Commenting on this issue, the director of the Central Banking Department of the State Bank, Truong Van Phuoc, told Viet Nam News yesterday that he could not say whether it was good or bad macro-monetary management.
"If inflation is water, nominal interest is the boat. As the tide rises, the boat surely follows," said Phuoc. "In any economy in which inflation is rising but nominal interest rates are falling, we should be concerned."
Source: Viet Nam News
