VINACHEM

VietNamNet Bridge – Overseas remittances, foreign direct investment capital and foreign currency credit have all helped cool the foreign currency market. Yet economists still cast dubious eyes at the dong/dollar exchange rate performance for 2010.

Since late 2009, the official dong/dollar exchange rate has been adjusted twice by the State Bank of Vietnam, forcing the dong to lose 8.86 percent in value against the dollar. The gap between the official market rate and black market rate (which once climbed to 1000 dong per dollar) has since narrowed.

Both the official and black market show decreases in their rates. On April 9, the commercial dong/dollar exchange rate announced by banks was 19,080 dong per dollar and 19,130 dong per dollar on the black market.

Dr. Vu Dinh Anh, Deputy Director of the Price and Market Research Institute under the Ministry of Finance, has attributed the dollar price decrease tendency to the improved dollar supply.

“The cash flow to Vietnam in the first months of 2010 was relatively large,” he noted. “The foreign direct investment (FDI) disbursement rate was high, while kieu hoi (overseas remittance) was satisfactory and not as low as previously predicted.” He added that this does not include cash flow to the stock market, real estate market and other channels that government agencies cannot calculate exactly.

Another source of foreign currency, Anh mentioned, comes from the credit system itself. Many enterprises have shifted to borrow dollars instead of dong to enjoy the low dollar interest rate of 6-6.5 percent instead of the high dong interest rate of 16-20 percent.

“Enterprises that borrow in dollars do not use them to import goods, but they sell dollars on the domestic market for dong,” Anh explained. “The higher supply of dollars has forced the dong/dollar exchange rate down.”

The dollar price decrease has surely benefited businesses, but Anh and other financial analysts agree that the inability to measure the foreign currency flow into Vietnam may cause unexpected shifts in the exchange rate.

Dr. Vo Tri Thanh, Deputy Director of the Central Institute for Economic Management (CIEM), remarked that the foreign currency flow is one factor that has an enormous impact on the exchange rate.

“Vietnam is an economy with high dollarization levels, so people can easily transfer assets in dong to foreign currencies, including gold. How the process goes will still depend on the confidence of Vietnamese people in the finance market and the local currency,” Thanh observed.

“As such, the dong/dollar exchange rate will partially decided by the inflation rate,” Thanh concluded.

If inflation is high, the dollar volume kept among people would increase. This would then lessen the effectiveness of monetary policies since the Government will not be able to control the money supply for the national economy. If so, dollarization will directly affect production and business.

Commenting on dollarization, Dr. Le Dang Doanh estimated that some $9.7 billion are being held as private assets.

“This huge sum of money shows that Vietnam does not lack foreign currency, but has problems in foreign currency liquidity.

Source: VnExpress