Rock solid currency is key

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Sherman Chan, HSBC’s Asean economist said the only welcome sign in recent months was the stabilisation of the Vietnam dong, which should help to limit imported inflation.

“However, the widening trade gap also warrants immediate attention, as it may weigh on market confidence and subsequently exert pressure once again on the recently stabilised currency,” said Chan.

Meanwhile, Deputy Governor of the State Bank Nguyen Van Binh said controlling inflation and boosting national foreign currency reserve remained top priorities for the authority.

Deputy Prime Minister Nguyen Sinh Hung at last week’s mid-term Consultative Group (CG) Meeting revealed that this year the country had beefed up national foreign currency reserve by around $2 billion.

The additional funds came via the State Bank’s continuous dollar purchases from the local banking system. By end of last week, the dollar was trading at VND20,550/USD.

Hung said he expected that in 2012, Vietnam’s foreign currency reserve would be enough to cover up to 16 weeks of imports.

Vietnam’s exports climbed an impressive 18.9 per cent year-on-year in May but imports surged 28.1 per cent, resulting in a trade deficit of $1.7 billion, double the shortfall recorded a year ago.

However, on a year-to-date basis, year-on-year export growth of 32.8 still outpaced import growth of 29.7 per cent. The trade deficit accrued in the first five months of the year hit $6.6 billion compared with the government’s forecast of $14 billion for the whole of 2011.

“If no solid improvement is seen in coming months, depreciation pressures may re-emerge and again intensify inflation through higher import prices,” said Chan.

Tran Du Lich, a member of the National Monetary Policy Advisory Council, said that despite the trade gap, the forex market would stabilise with recent policy moves from the authority.

Two weeks ago, with Circular No.14/2011/TT-NHNN, the central bank lowered the dollar mobilizing interest rate cap.

This saw the maximum dollar deposit rate for economic entities drop to 0.5 per cent per year, down from 1 per cent per year. Meanwhile, individual greenback depositors saw a maximum rate of 2 per cent, per year instead of 3 per cent, per year as previously.

On the same day, with Decision No.1209/2011/QD-NHNN, the State Bank lifted its reserve requirement for foreign currency deposits by 1 per cent.

Accordingly, the reserve requirement ratio for deposits of less than 12 per cent would be 7 per cent. For deposits longer than this, the ratio would be 5 per cent.