State boldly standing behind local currency

The recent explosion in the gold market has rattled foreign exchange rates

The government has pledged that any further devaluation of the dong would come after Tet, in February, but the market is waiting for increased dollar supplies.

A Vietcombank source said last week’s announcement  was akin to icing a fevered patient.

“Greenbacks pumped into the market are like pills to cure the pain,” said the Vietcombank official.

Last week, Committee for National Fiscal Surveillance chairman Le Duc Thuy said the government wanted to send a message to the public that there would be no move on adjusting the Vietnamese dong and US dollar rate in the next three months.

The State Bank also posted a message via its website that it will sell more dollars to the market. The authority also held a meeting with local commercial banks to measure the volume of US dollars to be pumped into the market catering for imports of necessary items.

“We reaffirmed that the central bank will keep current stable forex rate until the year’s end,” said State Bank governor Nguyen Van Giau.

The central bank would take strong measures on supplying US dollars to the market for necessary imports such as petroleum, fertiliser and material inputs for production.

The central bank sold $200 million to local credit institutions in October instead of being net buyer in September purchasing $300 million from those institutions.

The move stemmed from the fact that further depreciation would lead further inflation pressures which touched 7.58 per cent as of the end of October, this year.

Thuy estimated that Vietnam’s trade deficit would stand at around $12.5 billion in 2010.

The estimation was still lower than the previous projection of $13.5-14 billion, while a deficit in the balance of payment is estimated at $4 billion for this year.

In another development, US dollar supplies are being improved. Foreign direct investment disbursement posted a year-on-year increase of 7.1 per cent last month, in comparison to the 4.8 per cent growth in the first nine months, reaching $9 billion. 

The forex rate between the dong and US dollar has kept rising during the last two weeks.  The black market rate reached VND21,000 per dollar on November 3 in Ho Chi Minh City, creating a gap between the official and black markets of 1,500 points.

The rate started falling to VND20,500 per dollar on November 5, a day after the government announcement  was made public.

“With dong still heavily managed by the authorities, we believe the current policy objective to boost economic growth and raise incomes could imply further devaluation in 2011.

“Even in a scenario where portfolio investors return to Vietnam, the authorities are likely to use this opportunity to replenish the forex reserves, while maintaining a competitive exchange rate.

Unlike other central banks in the region, we do not believe the central will proactively use the Vietnamese dong exchange rate to manage inflation,” read Standard Chartered Bank report on Vietnam risks and opportunities for 2011.