Strong hand is knocking forex market into shape

The public seems to be cutting down its appetite for US dollars, but for how long?

On March 1, the State Bank issued Directive 01/2011/CT-NHNN confirming the dollar supplies will increase dramatically.

It follows Prime Minister Nguyen Tan Dung ordering state-owned enterprises to sell their dollars to the banking system two weeks ago.

Deputy Prime Minister Nguyen Sinh Hung said the banking system’s dollar denominated deposits stood at around $21 billion from corporates and individuals,  almost doubling the country’s foreign exchange reserves.

According to a BIDV source, once the prime minister’s order was executed, the banking system could have at least an additional $2-3 billion immediately.

“This order is a little bit reminiscent of the compulsory forex surrender requirement in the early 2000s. However, this order is applicable for state-owned enterprises,” said the BIDV official.

In the early 2000s, Vietnam applied a policy called the forex surrender requirement. It forced enterprises including foreign-invested ones to convert a certain portion of their banking deposit dollar holdings  into dong.

Nguyen Thi Kim Thanh, head of the Banking Strategy Institute, believed that by ordering state-owned enterprises to sell their dollar denominated deposits, the additional dollar supply could cover demand.

“The unofficial foreign exchange market will stabilise in tandem,” said Thanh.

Meanwhile, Vietnam’s trade deficit came in below $1 billion for the second straight month in February, marking a sharp improvement from a year ago. The deficit came in at $950 million, a little larger than the $877 million booked in January, but notably smaller than the $1.3 billion reported in February 2010.

The first two months of the year has seen the trade deficit narrow by about 20 per cent from a year ago.

HSBC’s economist for ASEAN Sherman Chan said as the government was focusing on controlling inflation by curtailing demand for imports, the trade deficit may further narrow.

“It all depends on how quickly and effectively the new policy measures are executed. The improvement in the trade balance is encouraging,” said Chan.

In 2011, the government aimed to curb the trade deficit at $14 billion.

“With recent tightening efforts on both monetary and fiscal fronts, this target is most likely achievable. However, we see the target figure as a little too loose, especially in light of the rather pressing need to narrow the trade gap and ease depreciation pressures on the local currency,” add Chan.

Three weeks ago, the State Bank announced a 9 per cent devaluation of the dong. The authority set the VND/USD reference rate from February 11 at VND20,693 compared with VND18,932 on the previous day.

It also narrowed the trading band from 3 per cent on either side of the reference rate to 1 per cent. In a similar move, it also weakened the midpoint by 5.44 per cent in November 2009, when it narrowed the trading band to 3 from 5 per cent either side of the reference rate.

By end of last week, the VND/USD exchange rate fell to VND21,770 per dollar on the unofficial market. As local banks are allowed to trade the dollar 1 per cent either side of the reference rate, the maximum rate is set at VND20,900 per dollar within the banking system.