Avoiding Exchange Rate Risks

 

In 2008, the exchange rate rose 5.4 per cent in the interbank market, compared with 0.14 per cent in 2007. The rate was more than 8.5 per cent in transactions at credit institutions. On the free market, it was 9.1 per cent, compared with 0.19 per cent in 2007.

 

Remarkably, USD fevers had widened the spread between the rate on the interbank market and the free market to VND2,000 per USD.

 

The State Bank of Vietnam’s widening of the exchange rate band to 3 per cent was seen as a move to let the local dong to devalue 3 per cent against USD. At present, one USD is equivalent to VND17,400.

In 2008, USD appreciated against euro, pounds and Asian currencies. The tie of VND value to USD made VND appreciate against regional currencies. This reduced the competitiveness of Vietnamese exported goods.

 

A currency of high value makes imported products cheaper and exported goods dearer. Apparently, profits of exporters will reduce. Consequently, the trade deficit will be widened.

 

The Vietnamese exportation is encountering really hard difficulties. According to the General Statistics Office (GSO), Vietnam’s exports valued at US$3.8 billion in January 2009, a sharp fall from December 2008.

 

Although the trade deficit was only US$300 million, the Vietnamese exportation will encounter more difficulties due to low prices of materials, according to economists.

 

In a fourth study released by the Vietnam Programme at Harvard University, which has been sent to the Government of Vietnam, said that one of the reasons leading to the trade deficit was the appreciation of the Vietnamese dong against currencies of major trade partners. When the currency is valued high, it will make imported products cheaper and exported goods dearer. Certainly, profits of exporters will reduce. With heavy reliance on export and a more opening economy to imports, Vietnam could not keep the value of VND high in a long period of time, or in the ongoing economic recession in 2009.

 

 

A research group of the Bank for Investment and Development of Vietnam (BIDV) also released a report on exchange rate forecasts for 2009. The author predicted that the world economy will significantly slow down in the year, many countries will see negative growth rates and prices of commodities will continue declining.

 

The disbursement of FDI capital is forecast to reach US$10 billion in 2009, equal that in 2008. In 2007, the disbursement of ODA capital only stood at around US$1.5 billion, compared with estimated US$2.5 billion in 2008. As much as US$1.5 billion worth of foreign indirect investment will be withdrawn from the market in 2009. Overseas remittance is predicted to plunge to US$4 – 5 billion in 2009 due to global economic crisis. With this scenario, experts forecast that the Vietnamese dong will devalue by 3.5-5 per cent against US dollar in 2009.

 

Experts projected that the world economy falls to a lowest level in the second quarter of 2009 and revive in the third quarter.

 

USD and JPY will strengthen against other currencies until the end of the second quarter. Therefore, the exchange rate between USD and VND will increase to the highest of 18,000 - 18,200 at the end of the second quarter before sliding to 17,600 - 17,800 at the end of the year.

 

The Standard Chartered Bank said in its Vietnam Report in January 2009 that the USD/VND exchange rate will be 18,500 in 2009.

 

Many specialists feared that the USD/VND exchange rate would be widely volatile in 2009. However, they expect the sound intervention from the State Bank of Vietnam when there are problems.

According to an official from the State Bank of Vietnam, the strong exchange rate change policy may lead to unforeseeable risks. Many Vietnamese enterprises borrowed USD from domestic and international banks. If their main incomes are in VND and they have to settle debts in USD, their profits will reduce in the event of higher USD/VND exchange rate. Even, some may be unable to settle debts and banks will have to incur more bad debts. In fact, many companies reported in their financial statements in 2008 that their business results were seriously affected by the exchange rate risks.

 

The typical example of foreign exchange risk is Pha Lai Power Joint Stock Company. The power generator borrowed in Japanese yen. It had to incur double exchange rate risks: one is the depreciation of VND against USD and the appreciation of yen against USD. Currently, the shares in Pha Lai Power Joint Stock Company were put under special surveillance of market authorities because they suffered losses in 2008.

 

The depreciation of the local currency makes imported goods more expensive. But, most imported commodities into Vietnam are materials and machinery. As a result, the country will “import inflation” from other nations when VND depreciates. If inflation recurs, the depreciation of VND will lead to price escalation.

 

Another risk is the erosion of confidence of the public and foreign investors in the local dong. They will rush to buy foreign currencies or gold when the local VND depreciates. Foreign currency fevers can unpredictably happen.

 

Although the central bank applies many policies to prevent dollarization of the economy, many shifted savings from VND to foreign currencies. To keep foreign currencies now seems the best way to prevent foreign exchange fluctuations.

 

In addition to risks arising from the depreciation of the Vietnamese dong, another aspect for the State Bank to consider the depreciation of VND is that it does not increase the competitiveness of exported goods and the exchange rate does not increase the national competitiveness. Price is the last to enhance the competiveness. Under the current situation, the Government should apply suitable policies to adjust the exchange rate to make the public, the business community and investors assured in doing business in Vietnam. When the exchange rate is forecast to be adjusted this year, enterprises should have plans to restructure their debts to avoid risks.