The public and the corporate sector alike are elbowing their way to each and every source of dollar supply. It is increasingly difficult to buy just a penny in the banking system while the dollar rise on the unofficial market shows little sign of abating anytime soon.
Confidence needs restoring
By Pham Vu in HCMC
The public and the corporate sector alike are elbowing their way to each and every source of dollar supply. It is increasingly difficult to buy just a penny in the banking system while the dollar rise on the unofficial market shows little sign of abating anytime soon.
Officially the dollar is cheaper at banks than outside but no one can buy it at the publicly quoted rate that is capped at VND19,500 to the dollar. The way out for those in need of dollar funds is to comb the underground market for this hard currency at a far higher price.
To pay a fertilizer import bill, a company based in the northern city of Haiphong has been compelled to buy dollars from unauthorized money changers at VND1,200-1,300 higher than the mandatory rate, according to Saigon Tiep Thi newspaper. So for one million dollars bought outside the banking system, this company has to pay an extra VND1.2-1.3 billion.
Such on-off market jitters are not uncommon. Since end-2007, the dollar has steadily strengthened against the Vietnamese dong at a much higher pace than the previously seen 1%.
In early 2008, the dollar traded at as low as VND15,300 given slackened demand and exporters were then found to sit on huge piles of foreign cash. But all of a sudden, dollar supply turned scarce in May that year, thereby causing the exchange rate to shoot up to VND18,000.
Time and again the ups and downs of the forex market cycle have been repeated.
In such a situation, the best strategy for those having dollar funds on their hands is to hold on to the money in the hope that they would earn more as the dong might continue to fall. So what happens to those in dire need of the dollar? They would choose to buy anyway for fears that they would not afford to get hold of it at the current exchange rate. Then they would put the foreign currency in banks.
According to figures from banks in HCMC which the online paper Vietnamnet puts on its Vietnam Economic Forum site, local currency savings deposits this year are forecast to rise 18.5% to around VND500 trillion but those in foreign currency may surge a staggering 45.2% to VND198 trillion equivalent.
Given huge demand for dollars, the difference between the official and unofficial exchange rates is widening to a level unseen before. Tran Hoang Ngan, vice president of University of Economics HCMC and member of the National Financial and Monetary Policy Advisory Council, is quoted by Tuoi Tre newspaper as saying that normally, the acceptable discrepancy is several dozen dong but it has now hit VND2,000.
“A grave concern is the black market exchange rate has become a benchmark for banks and their customers to transact with each other… So, the exchange rate officially quoted by banks as per central bank regulations is useless.”
He warns accounting information about the company and the economy as a whole would be distorted. “The actual purchasing price is VND21,500 per dollar but the price entered into the accounting book is only VND19,500, so the remaining amount should be factored into other items.”
If the situation was prolonged, more and more companies would be forced to violate the rule that requires all foreign exchange deals to be undertaken within the permissible trading band and the interbank rate set by the central bank.
As usual, to dodge this rule, the corporate borrower takes out a local currency loan from the bank to buy the dollar on the black market, then sells it to the same bank at the lower official rate, and finally signs a contract to purchase the dollar from that bank. Nonetheless, the borrower incurs all sorts of fees along the way.
Different causes of exchange market volatility have been pointed out, but for many experts, they boil down to the strong gold market rally, the ghost of inflation, and the way the central bank regulates the market.
Speaking in Tuoi Tre, Tran Hoang Ngan points an accusing finger at gold. “Drastic state intervention, especially in the gold market, is needed because gold is leading the way in influencing the unofficial dollar/dong exchange rate. And this spills over into the banking system.”
Actually there is a widespread belief that gold import on which the ban has just been lifted by the central bank is a key driver of the dollar rally, a banker says in Thanh Nien newspaper.
Tran Du Lich, director of the HCMC Institute for Economic Research, told Doi song va Phap luat newspaper early this month that gold and dollar prices are interrelated. But, he says on Vietnamnet, there is another reason: inflation. It is creeping into double-digit territory, thus leading people and businesses to hold on to their dollars.
Any rise in inflation would cause the exchange rate to increase, Le Xuan Nghia, vice chairman of the National Financial Supervisory Commission, says in Thanh Nien, adding the higher exchange rate would in turn push up inflation. He describes this as “the wheel of death”.
Another expert told Thanh Nien that the lack of policy transparency and consistency has put the market on tenterhooks.
The authorities have in fact taken no clear-cut measures to cope with the situation. The public and the corporate sector are always left guessing at what the authorities would do next and the resulting outcome is the market is clouded with uncertainty and unpredictability.
An article published in Thoi bao Kinh Te Saigon also says part of the problem is the dampened market confidence in the central bank’s moves and ability to implement its commitments. The central bank’s policy has so far been unclear, providing fertile ground for speculators.
The Saigon Times Daily