State Bank Committed to Keeping Forex Stable

Since March 2015, the dollar has risen on the world market, increasing pressure on the exchange rate in the domestic market. On May 7, 2015, the State Bank of Vietnam (SBV) revised up the average interbank exchange rate by one percent rate to actively lead the market. This is the second time the exchange rate has been increased since the beginning of the year, increasing to the margin of 2 percent for the operating rate target of 2015.

 

Increased exchange rate has led to rising input prices because most raw materials are imported. Only exporters benefit from the profits earned in US dollar. Another reason is that when the domestic market expects that the rate will increase in the future, companies will continue to save US dollars and investors continue to hold rate, which will make the rate more intensified. When the state bank uses up the rate amplitude would, the expectations will be eliminated and pressure on the market relieved.

 

In fact, the exchange rate operating policies of the State Bank rate since 2012 has been clear and consistent. The State Bank made public the expected increasing margin in the beginning of the year, thereby operating within the proposed range. Annually, exchange rate is controlled within proposed amplitude. Specifically, in 2012 and 2013, the State Bank controls the exchange rate adjustment of not exceeding 2-3 percent. In fact, in 2012, exchange rate didn't need adjusting; in 2013 it only rose one percent; in 2014, it got adjusted by one percent while the oriented amplitude didn't exceed two percent. In 2015, the State Bank will control the exchange rate within the amplitude not exceeding 2 percent for the whole year.

 

However, in only the first 4 months of the year, exchange rate has been adjusted twice with the total rate of 2 percent, equal to the quota of the year. Ms Nguyen Thi Hong, SBV Vice Governor analysed: The first time, exchange rate got adjusted by 1 percent on January 1, 2015 after the Government Resolution was enacted to actively lead the market as well as to help exporters and importers be active in their business early in the beginning of the year in accordance with domestic and foreign monetary market movements. Shortly after SBV adjusted the average interbank exchange rate, market psychology was relieved. Organisations and individuals started to sell more and more foreign currency to credit institutions; the SBV purchased a sizable amount of foreign currency which made up for the amount of intervened foreign currency sold during the end of 2014.

 

However, after the last exchange rate adjustment, the USD/VND exchange rate keeps increasing rapidly, reaching the regulated amplitude. Deputy Governor Nguyen Thi Hong affirmed that in the future, SBV will control the stable exchange rate within the band of 2 percent and is willing to sell foreign currency to stabilise the exchange rate within the committed band made public in the beginning of the year.

 

According to Deputy Governor Hong, that the exchange rate adjustment should not exceed 2 percent was calculated on the basis of considering a wide range of macro-economic factors and domestic and foreign currency. However, the time and frequency depends on the flexibility of the State Bank, considering not only economic factors but also psychological factors and market expectations.

 

However, increased exchange rate pressure is still very large due to the trend that US dollar is increasing in the world market. Some people have proposed that the two percent amplitude be broken to support exports. The devaluation of the local currency is beneficial to exporters, yet other industries dependent on imported raw materials will be adversely affected when the price of imported inputs measured in local currencies increase. The bad impact is very large for some sectors such as textiles, wood products, and leather products with the rate of imported material of 82.5 percent, 70 percent, and 50-60 percent, respectively, in 2013.

 

Increased exchange rate also worsens foreign debt obligations for the government and affects the control of public debt which is close to 65 percent of the GDP. Corporate debts payment obligation will be increased, in terms of foreign loans of enterprises.

 

The State Bank, as the market operator, needs to carefully consider the goals set. Deputy Governor Hong affirmed: "Through the analysis and evaluation of several aspects of exchange rate effects and the whole national interest, the State Bank will continue to keep the exchange rate in the range of 2 percent as the orientation at the beginning of the year."