ietnam dong hits fresh lows as bank calls for actionReuters,
Friday June 6 2008 By Ho Binh Minh
HANOI, June 6 (Reuters) - Vietnam's second-biggest lender called on the central bank on Friday to take more action to stabilise the dong as it fell to fresh lows under pressure from rising import prices.
Ratings agencies have turned negative on the outlook for Vietnam, arguing policy makers are not doing enough to combat the Communist country's 25-percent inflation and swelling trade and current account deficits.
The State Bank of Vietnam, or central bank, set its official daily rate for the dong at 16,124 per dollar on Friday, its lowest level in more than six months. The currency is down just 0.06 percent so far this year.
But the gap between the official rate and the rate the currency is traded at on the black market and offshore is widening, prompting state-run BIDV, Vietnam's second-largest lender, to call for action from the central bank.
"The State Bank should deploy stronger measures to intervene in the market," BIDV Chairman Tran Bac Ha said in a statement sent to Reuters.
On the black market in Hanoi, the dong was changing hands on Thursday at a record low of 18,500 dong per dollar, nearly 13 percent below the official rate.
Offshore non-deliverable forwards were betting the dong would drop in a year's time to 23,500/24,500 per dollar, suggesting a depreciation of around 32.2 percent, deeper than 30 percent indicated on Tuesday.
"The exchange rate fluctuation on the free market in recent days is mainly due to psychological and speculative factors," the central bank said in a statement.
Onshore foreign exchange markets can trade the dong within a band of plus or minus 1 percent from the daily official rate.
FLEXIBLE POLICY
The central bank has said it pursues a flexible exchange rate while the government has said that during 2008 it would allow only a 2 percent annual appreciation or depreciation of the dong.
Given the soaring price of imports, such as raw materials, Vietnam's trade deficit more than trebled to $14.4 billion in the first five months of 2008, higher than the $12.4 billion deficit for the whole of 2007.
BIDV said the dollar rose due to strong demand from importers, especially to pay for oil products, steel and medicine.
It also said importers of luxurious goods and cars have to buy dollars from the free markets, contributing to the rise in the U.S. currency. Regulations don't encourage banks to issue foreign exchange to importers of luxury goods, including cars.
In the past few weeks Fitch Ratings has downgraded its outlook on Vietnam's credit rating to negative from stable and Moody's Investors Service has cut the outlook to negative from positive.
Both agencies highlighted growing economic imbalances.
"The policy response has been both too slow and too small as real policy interest rates remain deeply negative even following their recent increase," Fitch said.
Vietnam has carried out a number of policy measures to try to combat the growing threat of inflation, including raising official interest rates and tightening bank reserves requirements to tighten cash in the banking system.
However, a state-imposed limits on commercial banks mean that deposit and lending interest rates are well below the level of inflation. (Editing by Neil Fullick
