Foreign Currency Strain Has Not Ended

 

The US dollar has depreciated on the world market and weakened against most major currencies after Brazil, Russia and China decided to convert US$70 billion from US dollar reserves into other currencies. In the past three months, the US dollar lost 9 per cent because investors sold US dollar notes to buy other assets which are expected to generate wider margins.

 

However, in Vietnam, US dollar still strengthened against Vietnam dong. According to the reports from the State Bank of Vietnam, interbank USD/VND foreign exchange rate is 16,952 on June 17. This was the first time since March the rate exceeded the benchmark of 16,950. After the exchange rate was widened from +/-3 per cent to +/-5 per cent on March 24, the interbank USD/VND exchange rate dropped from 16,980 to less than 16,940.

 

Commercial banks usually quoted the highest exchange rate within the trading band of +/-5 per cent. In the past 10 days, they quoted the same bid/ask prices, instead of higher selling price. On June 17, commercial banks quoted both buy/sell prices at 17,800 dong per US dollar. On the free market, people queued to buy the greenback, leading the appreciation of the currency.

 

The dollar crunch over the past months forced banks to ask enterprises to sell the dollars at quoted prices. However, many forecast that the government might not agreed with this move and the central bank would have to increase the exchange rate to deal with the supply and balance strains.

 

However, the rate will not change much in the coming months because the State Bank of Vietnam will adopt measures to keep. According to specialists, exports accounted for 72 per cent of GDP but export production is mainly offshore outsourcing. To export, Vietnam has to import most materials. Earlier, the exchange rate was increased to clear stockpiled goods and encourage export but local producers now have to import materials at higher prices while global demand may not be as high as expected. Thus, higher exchange rate will put pressures on both importers and exporters. According to monetary experts, the State Bank of Vietnam should maintain the exchange rate in a period of time.

 

Although the governor of the State Bank of Vietnam affirmed that US dollar supply and demand were “normal”, shortage was still found everywhere. The scarcity is attributed to the keeping of US dollars by enterprises which feared the exchange rate change might leave negative impacts on their business activities. Meanwhile, banks lack US dollars to lend enterprises in recent months as well as to sell to the market.

To encourage enterprises, banks have slashed USD deposit rates to 3.5 per cent - 4 per cent per annum. This is a good chance for enterprises to access cheaper costs but they do not desire because they fear possible higher exchange rate in the near term will give them more pains than gains.

 

To lend US dollars, banks have offered to lend VND at interest rate of USD which is much lower than that of the domestic currency. In fact, commercial banks want to sell US dollars for Vietnam dong to enterprises but they forced enterprises to sell back US dollars at the exchange rate applied at the time they lent VND. This is a good option for enterprises which believe in the relative stability in the next few months. If they borrow VND at USD interest rate, they are still subsidized 4 per cent of interest from the Government. Thus, they will enjoy 0 per cent interest rate. This product proves to benefit both sides.

 

Enterprises will enjoy the lowest interest credit product while banks can clear its US dollars to increase incomes. The exchange market will have more commodities to push back the shortage. Risks against all sides will be low if exporters have stable sales and letters of credit are opened at reliable banks.

 

In the worst case that there is not enough foreign reserve, the State Bank of Vietnam will consider adjusting the band of exchange rate. If banks can increase lending of US dollars, the supply to the market will be solved.