Dong on depreciating trajectory against dollar

The growing trade deficit is one reason for the new trend

On March 28, 2008, the dong/dollar rate went up to VND16,120 per dollar, higher than the State Bank’s official rate of VND15,960 per dollar. According to a State Bank source, the growing trade deficit and decreasing dollar supply from foreign investors via foreign portfolio investments into the local bourse was making the dollar “less available” on the market and thus driving the dong to depreciate.

“Though the State Bank is willing to buy dollars, over the last two weeks, the selling demand from commercial banks has dramatically decreased,” said a State Bank official. Last week, in response to the prime minister’s request to purchase dollars from commercial banks to clear the greenback surpluses arising from exporting enterprises, the State Bank released document No. 2605/NHNN-QLNH committing to buy dollars from commercial banks with foreign currency long-positions which have bought dollars from exporters.

Foreign currency long-positions occur in case a bank’s foreign currency credit is larger than its foreign currency debit. However, a Vietcombank source said the dollar was not in surplus with the increasing demand from importers. Over the first quarter of 2008, the country’s trade deficit reached $7.37 billion with imports hitting $20.39 billion, 62.5 per cent year-on-year growth.

“The dollar supply-demand balance has changed dramatically over the last few weeks,” said the Vietcombank official. Two weeks ago, exporters still found it hard to sell dollars to commercial banks amid dollar surpluses. Local banks even applied 2-3 per cent fees on currency exchanges to export enterprises.

Apart from trade deficit impacts, there is a possibility of increased dollar outflows from foreign portfolio investors and dwindling market dollar supplies. A foreign bank source in Vietnam said that over the last few weeks, dollar inflows had been decreasing with outflows rising.

At the moment, Vietnam places no restrictions on foreign portfolio investments which mean that the foreign portfolio investors could “come in” and “go out” freely. However, “at the border”, foreign capital should be converted to local currency for investment and in return, should convert local money into foreign currency for remitting abroad.

Nguyen Doan Hung, State Securities Commission’s vice chairman, said by the beginning of this year, foreign funds with capital of around $5 billion were still seeking investment opportunities to disburse into local bourses.