Exchange rates may trip economy in 2007

The State Bank is struggling to remain on top of US dollar/dong exchange rate as money floods into the bourse

The United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) has forecast that major currencies in the region will appreciate as a result of capital inflows. UNDP’s senior country economist Jonathan Pincus said Vietnam’s success in attracting foreign direct investment, portfolio investment, remittances and official development assistance would cause the Vietnamese dong to appreciate against the US dollar if the State Bank did not introduce appropriate checking measures.
So far this year, the dong has gained 0.3 per cent against the US dollar, currently sitting at VND16,047 per dollar despite an earlier State Bank plan to slightly depreciate the local currency by 1 per cent to maintain trading competitiveness.
Since September 2006, local banks have experienced US dollar surpluses for the first time with massive dollar inflows into the booming stock exchange and sharp increases in FDI attraction. This situation has put pressure on the State Bank, as the ultimate purchaser of local banks’ dollar surpluses, to revalue local currency.
“Exchange rate management has become more challenging with the massive growth of local bourses, because a minor change in the rate could have a wide-range of effects,” said Phi Dang Minh, head of the State Bank’s Foreign Exchange Department.
UNESCAP’s statistics show by 2006, with more than 200 listed joint stock companies, Vietnam’s market capitalisation stood at just $14 billion, or 22.4 per cent of GDP. But, according to the World Bank’s latest report, market capitalisation to date has reached $24.4 billion - 39.2 per cent of GDP. According to estimates, from November 2006 to March 2007, foreign investors have injected about $4 billion into local bourses.
Additionally, over the first four months of 2007, Vietnam has lured $3.51 billion via foreign direct investment, recording 54.7 per cent growth against 2006.
According to an official from Vietcombank’s Foreign Exchange department, local banks are still in dollar surpluses, resulting in banks’ lower dollar trading price than State Bank’s official rate.
In early 2007, local banks were allowed by the State Bank to trade up to 0.5 per cent either side of the daily published official rate from a previous percentage of 0.25.
“A wider trading band for domestic transactions is a good thing to the extent that it allows minor adjustments to take place in the official market rather than in the informal market.
“But, careful supervision of banks and development of more sophisticated instruments to control the money supply are needed to ensure that financial liberalisation does not weaken the capacity of the State Bank to manage the exchange rate while keeping inflation in check,” said Pincus.