The greenback price has been increasing since November 7, when the State Bank of Vietnam decided to raise the forex trading band to +/-3% from +/-2%. However, no price fever has occurred, with banks’ foreign currency trading activities going smoothly.
The pressure on official exchange rate
The inflation rate of the first 10 months of 2008 was the highest level in the past 10 years (21.64% over the end of 2007). Meanwhile, the trade gap in the first 10 months of was $16.3bil. Export turnover has been decreasing for the last few months ($6.547bil in July, $6.018bil in August, $5.27bil in September and $5.1bil in October).
Vietnam’s export items are all facing big difficulties due to the global financial crisis, while 63% of the country’s GDP is accounted for by exports. Therefore, boosting exports is an important task, and the exchange rate policy is a tool to assist in this work.
Since March 10, 2008, the exchange rate announced by the State Bank of Vietnam has been hovering around VND16,025-16,515/US$1, which is believed is not encouraging exports.
Greenback price increases because investors anxious
The dollar price on the black market began rising on October 23, 2008, before the central bank announced the wider trading band at +/-3%. While commercial banks’ rate was at VND16,820/US$1, the rate on the black market hit the VND17,000/US$1 threshold. On November 7, Vietcombank’s rate was VND16,841/US$1, while the rate on the black market was VND17,300/US$1.
It is likely that for some additional days, the exchange rate on the black market will remain higher than the rates offered by commercial banks.
Analysts say that it is because domestic investors fear that foreign investors will sell stocks, collect dollars to transfer abroad. The decision by the central bank to widen the forex trading gap makes people think that the dollar price is on the rise.
However, economists have pointed out that the exchange rate on the black market does not have much effect on the exchange rate in general. In Vietnam, the exchange rate is decided by the official market, or the market in which banks and businesses make transactions.
VND/US$ exchange rate will not see big changes
According to Le Duc Thuy, former Governor of the State Bank of Vietnam, only the REER (the real effective exchange rate) should be used as the basis to set exchange rate policies, the policies should not be simply drawn up based on supply and demand. However, it is highly possible that in some more years, Vietnam will not float the exchange rate. Vietnam fears that risks may occur with foreign debts if it floats the exchange rate.
It is expected that the central bank will follow the flexible exchange rate policy in the last months of the year. The central bank has affirmed it is capable of extinguishing any foreign currency fevers that might break out. The dollar supply among the public proves to be relatively big. Meanwhile, banks have big volumes of dollars as they have taken back deposits from overseas banks. The national foreign currency reserves by October had reached $22bil.
Bankers say that the inter-bank exchange rate may go up further before the end of the year, but will not increase sharply over the current level.
The sale price may reach VND17,200-17,500/US$1, they say.
Trinh Ngoc Lan
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