State Bank swims against tide

Combatting rising inflation has taken priority over currency concerns

According to HSBC economists, the last six weeks have been the longest period of sustained dong appreciation since the State Bank first started collecting official exchange rate data in 2001.

“Being unwilling to buy dollars [and release dong back into the system] due to liquidity and inflation concerns, the State Bank has allowed some appreciation in its daily official exchange rate as compensation for not supplying more liquidity,” said Daniel Hui, HSBC’s foreign exchange strategist.

In early October, the State Bank halved its annual depreciation target from 1 per cent to 0.5 per cent, forcing the rate to reach VND16,136/USD by the year’s end. However, increased foreign currency inflows toward the year’s end could put more pressure on the State Bank to accept further dong appreciation to clear the market’s dollar surplus, said a Vietcombank source.

The Vietcombank source said over the last few weeks, the State Bank had been reluctant to buy dollars from commercial banks to clear surpluses. The trend had forced commercial banks to trade the greenback at the bottom line of the State Bank’s trading band.

“From a foreign exchange market perspective, with strong dong demand and the removal of a key source of supply [the State Bank], the market exchange rate is rapidly falling,” said Hui.
At present, local banks are allowed to trade the greenback within 0.5 per cent of the State Bank’s daily official rate. The market rate has been falling in line with the State Bank’s benchmark rate over the last few weeks, hitting a year low of VND16,035/USD on December 14.

Nguyen Dai Lai, vice head of the State Bank’s Banking Development Strategy Department, said the central bank had avoided pumping dong into the market due to inflation pressures.
Over the past 11 months, Vietnam’s consumer price index posted a 9.45 per cent increase against December last year. The CPI in November reached 10.01 per cent year-on-year for the first time since 1995.

“The inflation problem is unlikely to recede in the coming months and it would appear that the authorities have already chosen inflation as a policy priority over currency,” said HSBC economists.
Lai added that increasing foreign currency inflows were still a major State Bank concern.
In the first 11 months of 2007, around $5 billion in foreign indirect investment was channeled into Vietnam’s stock market. Meanwhile, foreign direct investment reached $15.03 billion, up 38.4 per cent against last year. Overseas remittances are estimated to reach $5 billion this year.