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Exchange rate policy: A guessing game

Last update: 11:56 | 16/07/2018

The State Bank of Vietnam has enough resources to stabilize the foreign exchange market, which is under the pressure of change due to several factors. However, it’s not easy to guess the concrete steps it will take. 


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The price for U.S. dollar transfers quoted by commercial banks early last week made a big jump, soaring by more than VND100 to VND23,110 per dollar. Compared with prices on the free market, this price is just lower than the dollar selling price by merely VND30 per dollar but higher than the buying price on the unofficial market. However, the gap between the buying and selling prices of banks is as much as VND70, much bigger than the small gap of VND10-30 during previous exchange rate fluctuations.  

According to several banks, the foreign currency demand by institutional clients has increased compared with some months ago. The foreign exchange status of some banks is recorded at 0%, while the current regulation requires this ratio at a maximum 20% of the equity capital.

On the same day, Le Minh Hung, governor of the State Bank of Vietnam (SBV), the central bank, said at a Government’s meeting with local authorities that the central bank was ready to intervene and sell foreign currency to stabilize the market. Hung stressed that the SBV had bought US$11 billion since early this year to increase the foreign reserves.

Pham Thanh Ha, director of the SBV’s Monetary Policy Department, said the dollar/dong exchange rate had increased 1.2% in the year to date. One of the reasons for the rate rise is the interest rate of the U.S. dollar on the interbank market has reached 2%, much higher than interest rate of the dong for the same tenor. This is probably the crux of the problem.

There are several factors that are affecting the exchange rate.

The current demand for foreign currency loans by the corporate sector is not small, as the lending rate for U.S. dollars is still lower than the lending rate for dong. The general policy of the SBV is to gradually reduce foreign currency lending and limit the lending to only enterprises having U.S. dollar incomes from exports or services. However, it cannot stop foreign currency lending and switch to outright purchase immediately. Meanwhile, the foreign currency balance and mobilization of banks have declined due to the zero interest rate policy for U.S. dollars.  

When the U.S. dollar appreciates against other foreign currencies as a result of the U.S. Federal Reserve’s interest rate hike, the foreign currency lending rates of Vietnamese banks are raised. The U.S. dollar rate bids and offers on the interbank market also change with this lending rate hike.

Though the SBV is fully aware of the U.S. dollar interest rate changes in the interbank market, its foreign exchange policy is affected by two factors. First, the central bank must reduce the dong interest rate to support enterprises in five priority sectors, thereby boosting economic growth. Second, the bank had to continuously pump out dong to buy ample foreign currency supplies in the first half of this year. Therefore, it has to weigh carefully the volume and the time to withdraw the amount of dong pumped out.

However, the most surprising factor is the trade war between economic powers. Canada has retaliated the U.S. by slapping tariffs on U.S. imports worth US$12.5 billion, effective from July 1. The European Union (EU) has warned that it will impose tariffs on US$300 billion worth of U.S. imports if U.S. President Donald Trump levies tax on European cars. On the Chinese part, it’s not known whether unintentionally or on purpose that the Chinese yuan has continuously depreciated against the U.S. dollar. The dollar appreciation is making American goods more expensive, and so the U.S. huge trade deficit with China and the EU could hardly be reduced. This situation would trigger a currency devaluation war.

Vietnam is not spared from the impact of the international financial developments. The U.S. dollar rate on the interbank market does not have any sign of decline. To prevent dollar speculation, the SBV has to raise the dong interest rate on the interbank market to a level at least equal to the U.S. dollar rate. Furthermore, to stabilize the value of the dong, the bank may have to consider the possibility of raising the dong mobilization rate. Technically, it can set a ceiling rate of 5.5% per annum for short-term deposits of less than three months instead of the current six months. The interest rate is the solid anchor to keep the exchange rate at bay.

In addition, the lending rate policy should be flexible. The lending rate for stocks and real estate should be raised and interest rate support should be offered only to the production sector, especially agriculture and export. Emerging markets like India, Indonesia and the Philippines have raised the interest rate of the domestic currency more than once since the beginning of this year.

The SBV governor said, “In the current condition, we have necessary tools and plans to intervene in the foreign exchange market and ensure macroeconomic stability.” The bank’s Monetary Policy Department director also signaled that “the bank will sell foreign currency at a price lower than the quoted rate if need be to stabilize the market.” Obviously, the SBV is in a positive standing. Still, the U.S. dollar price at its transaction office is currently quoted at VND22,700 per dollar for buying and VND23,294 for selling, VND20 below the ceiling price. The SBV’s dollar selling price is the highest in the market, so market participants have to think twice because the SBV’s phrase “at a price lower than the quoted rate” can be interpreted in various ways.

SGT

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