State Bank taking more flexible market stance

The central bank has reduced dollar buying to calm galloping inflation

Over the last two and a half months, with rising inflows of US dollars, local banks have been trading US dollars at the bottom line of the State Bank’s daily official exchange rate band.
According to a Vietcombank treasury department official, despite the State Bank reducing its dollar buying due to inflationary concerns, the dollar surplus is yet to be cleared

“It seems that the State Bank has only been buying dollars equal to the value of the central bank’s bills in Vietnamese dong that we have bought to keep the total liquidity stable,” said the official.
Recently, the State Bank reduced the targeted rate of annual depreciation to 0.5 per cent by the year’s end from 1 per cent, meaning the rate is expected to hit VND16,136 by the end of 2007.

However on November 29, the State Bank’s official rate -which has been gradually reduced since November - hit VND16,127/USD. Banking experts said the move indicated a more market-oriented approach from the State Bank.
“These recent events signal that the government is gradually accepting the role of foreign exchange flexibility in managing inflation,” said ANZ economist Katie Dean.

“A slightly stronger path for the Vietnamese dong will only stabilise Vietnam’s real effective exchange rate in the coming years,” she added. It should be noted that while the dong had depreciated against the greenback, other Asian currencies have not.

Tai Hui, Standard Chartered Bank’s Southeast Asia head of economic research, said capital inflows into Vietnam toward the year’s end were expected to rise and the dong would be under more pressure to appreciate.
Foreign direct investment and overseas remittances are forecasted at over $15 billion and $5 billion in 2007 respectively, a sum more than sufficient to compensate for a trade deficit expected to exceed $10 billion.

Over the last two weeks, there has been a tightening of dong liquidity, driving overnight inter-bank rates up to 12-15 per cent, per year. As a result, the State Bank has been buying back treasury bills from domestic banks via seven-day repurchase agreements at daily average amounts of VND2-3 trillion ($125-187 million).
“This is perhaps more than a seasonal or temporary phenomenon, but rather reflects the State Bank’s deliberate policy bias.
“We believe this signals the start of a period of more consistent monetary tightening, which is necessary given the threat of higher prices and economic overheating,” said Hui.