Experts voice scepticism over forex market stability

If Vietnam fails to curb its trade deficit, its forex market may become unstable in the long-term

Associate Professor Dr. Tran Hoang Ngan, a member of the National Advisory Committee for Monetary Policy, said Vietnam’s trade deficit remained high and the VND/USD exchange rate may increase again despite the State Bank of Vietnam (SBV) recently raising compulsory foreign currency reserve ratios by 1 per cent.

In the first five months of this year, Vietnam incurred a trade deficit of $6.6 billion, accounting for 19 per cent the country’s total trade turnover during the period, compared to the set target of less than 16 per cent.

According to Ngan, one of the most powerful measures to reduce the trade deficit is to raise the productive capacity and competitiveness of domestic firms against imports. This would require preferential taxes, administrative reform and in particular, lower lending interest rates.

Local companies currently face lending rates in the VND of 22- 23 per cent, much higher than other regional countries. Due to this, they face difficulties in raising capital and high production costs.

People continue to hoard dollars

It is a week since the SBV lowered the rate cap on USD deposits by individuals to 2 from 3 per cent, and cut the limit for institutions to 0.5 per cent from 1per cent, but USD deposits in Hanoi and Ho Chi Minh City have still risen, while VND deposits have continued falling.

A general director of a commercial joint stock bank said that over the past week, sales of US dollars by people to banks remained low. People have preferred to hold onto their USD or have deposited them into banks despite the low interest rates.

Although the price of USD against VND is low, the rate is expected to rebound toward the year's end on the back of a rising trade deficit.

Associate Professor Dr. Tran Hoang Ngan also said that many people are not interested in selling their USD to banks because of the low value of the USD versus dong.