Local currency lends economy a helping hand

The Vietnamese dong is showing unprecedented stability this year

A recent State Bank report put the dong’s depreciation against the dollar for the year at just 0.63 per cent. This compares with 0.87 per cent during the same period last year and 1.56 per cent in the whole of 2003.
The central bank’s foreign exchange management director Truong Van Phuoc said the dong’s performance had helped stabilise the economy in the face of a galloping consumer price index.
“There were several factors that kept the dong relatively firm,” Phuoc said.
“The most noticeable factor is the widening gulf between interest rates on the dollar and dong. Current dollar deposit interest rates, at an average 2.1 per cent, are much lower than the 8.0 per cent rates for the dong. This clearly makes it unattractive to hold dollar-denominated assets.”
Phuoc pointed out that increased foreign currency inflows were also a factor. Although foreign direct investment (FDI) flows have not been encouraging, the country has received large remittances from Vietnamese abroad in the first nine months. This is expected to continue for the rest of the year.
The hardening of currencies in some neighbouring countries, like the Singapore dollar, has lessened the need to weaken the dong to ensure export competitiveness.
Senior economist Le Dang Doanh said the central bank’s monetary policies had helped to curb the appreciation of the dollar.
“Just look at the dong movement in the last few years. Its depreciation against the dollar was at 3-plus per cent in 2000 and 2001, slightly lower at 2.1 per cent in 2002 and 1.65 per cent in 2003.
“I believe changes in monetary policy, including the de-dollarisation of the economy and removal of administrative restrictions on dong transactions in the last few years, have actually given the dong some flexibility to move in line with market forces,” he said.
Doanh, who is also a senior advisor to the Minister of Planning and Investment, said that the central bank’s latest move to pump dollars into the currency market to meet importers’ demand for foreign currency and, as such, to ease possible dollar shortages, was one such monetary policy.
Both Phuoc and Doanh agreed that the dong would not fall further by year-end though they refused to speculate on where it was headed.
Phuoc admitted however that in the case that it weakened, the central bank would step in immediately.
“Considering the fairly high trade deficit in the first nine months [$2.89 billion] and expected increase in the prices of oil, steel and iron on the international market, we will have to ensure the dong does not fluctuate too much against the dollar to push exports and stabilise the market,” Phuoc explained.