On January 6, 2015, the State Bank of Vietnam (SBV) decided to increase the interbank rate by 1 percent. This move was surprising but not new since the market sentiment was said to have prepared for new steps of exchange rate increase.
The ceiling US dollar - Vietnamese dong exchange rate at commercial banks was raised to 21,673 from 21,246. The dong was allowed to trade as much as 1 percent either side of the fixing. Effective from July 1, the range was from 21,243-21,673 dong per US dollar.
Exchange rate raised by 1 percent from January 7
According to experts, exchange rate pressures appeared before the SBV’s decision for the change. Commercial banks repeatedly raised the dollar price on their quotation notices. This aroused the speculation for this exchange rate change and banks were exploiting benefits.
The demand for US dollars increased. At most lenders like Eximbank, Sacombank, ACB and Techcombank, bid price was quite close to ask price, with a differential of just 20 dong. In big banks like Vietcombank and BIDV, the difference between bid and ask prices was only 25 dong per dollar. The ask price for US dollar at commercial banks climbed to 21,455-21,458 dong, nearly touching the upper limit. This was signs of supply and demand tension.
The SBV, as the last buyer and seller on the market, was forced to keep the ask rate at 21,400 dong per dollar. In late 2014, the central bank had to sell more than US$1 billion. Pressures on this regulatory agency are tense. If it had tried to peg exchange rate and continued to sell dollars, exchange rate reserves would have declined. The recently issued Resolution 01 of the Government required an increase in this resource.
Therefore, the new fixing was predictable and the time of application as somewhat surprised. However, looking back further in 2014, this development was quite reasonable. In 2014, the exchange rate was raised just 1 percent, much lower than 2-3 percent expected by the SBV earlier.
The SBV said that, after more than six months being maintained stable at 21,246 dong per dollar, this adjustment was aimed lead the market in an active manner, suit domestic and international financial market developments, and create sustainable stability on the forex market.
"The SBV will ensure the implementation of consistent measures and policy instruments to stabilise the exchange rate and foreign currency market on the new price level," the agency said.
Another 2 percent hike allowable for 2015
At a recent meeting with bankers, SBV Governor Nguyen Van Binh said the exchange rate is unlikely to climb more than 2 percent in 2015. But, the agency envisaged it a challenging task when the trade deficit was forecast to equal 5 percent of total exports this year.
The forex supply and demand balance is expected to have certain changes in 2015. Typically, the sharp drop in crude oil prices will have certain impacts on forex income of the State Budget.
However, with new trade agreements and treaties, Vietnam will have wider export markets and the country’s exports are projected to increase more favourably. Western embargo on Russia and US market recovery are deemed opportunities for Vietnam’s goods.
Foreign investment capital was expected to be a continued supportive factor for exchange rate stability. Inward remittances are also an important channel. In general, the central bank forecast a surplus balance of US$8 billion in 2015.
Given the target devaluation of 2 percent this year, with the hike of 1 percent at the beginning of January, the room for dong depreciation this year is thus narrowed. This will stimulate the supply of foreign currencies, particularly with big surplus in the last year.
According to experts, the quick decision on exchange rate showed active steps and decisive roles of the central bank in market regulation. This move also reflected its confidence in exchange rate stability in 2015.
Le Minh
Vietnamese
