Vietnam pays high cost to uphold domestic currency

Minh Tam

15:28 05/10/2015

The State Bank of Vietnam has taken a wide array of bold measures, including tapping the nation’s foreign currency reserves, to ease tensions in the forex market and materialize its commitment to uphold the Vietnamese dong, as it navigates through turbulence in the global financial market.

Vietnam pays high cost to uphold domestic currency

State Bank of Vietnam headquarters.

The Vietnamese central bank pumped some 5.5 billion USD into the local forex market from August 6, a few days before China started devaluing the yuan, the Saigon Times reported on October 2.
The monetary regulator sold a combined 3.8 billion USD in three weeks ending September 1 when the USD/VND in the interbank market hit 22,600 VND a dollar, above the cap of 22,547 VND/USD set by the central bank.
The State Bank of Vietnam (SBV) has devalued the dong three times in the year to date, each by 1%, and widened the trading band of the USD/VND rate twice last month to 3% from 1% before August 12, causing the dong to weaken by 5% from the beginning of 2015.
The latest weakening of the dong would create sufficient room to move against adverse developments at home and abroad, including a Fed rate increase by the end of this year, the bank said.
Adhered to its commitment to keeping the forex market steady, SBV will continue to sell foreign currencies to local banks through year-end, yet the amount is still unknown as an interest rate hike by the U.S. Federal Reserve is pending.
Vietnam’s forex reserves have been on the rise over the past three years, hitting a record high of 37 billion USD and ten tons of gold at the end of July, enabling the SBV to make maneuvers with the forex rate.
However, the nation’s reserve fund remains below the 12-week-import threshold recommended by international institutions.
In a move to ramp up its battle against foreign currency hoarding and curb the dollarization in the economy, the SBV lowered its cap on deposit rates, effective on September 28, for USD accounts held by institutions to 0% per annum (p.a) from the previous 0.25% p.a and cut the maximum rate on USD deposits for individuals to 0.25% p.a from 0.75% p.a previously.
Some analysts have raised concerns about this move, warning that the USD deposit rate cut would make “carry trade” in Vietnam less appealing, dampen overseas remittances and foreign currency deposits could even leave Vietnam, especially in the light of a Fed rate rise.
Economist Pham The Anh from the National Economics University told national broadcaster Vietnam Television that USD deposit rates in Vietnam have been lower than those in the international financial market.
Foreign institutions may move earnings, dividends or idle funds out of Vietnam to the U.S. or Europe for higher interest rates. “This is an obvious risk for Vietnam,” he said. However, the capital flight will not be worrisome given Vietnam’s tight forex controls.
Researchers of Saigon Securities, the leading brokerage house in Vietnam, assessed the recent rate cut could hurt the influx of overseas remittances when USD interest rates in Vietnam are even lower than the two-month USD LIBOR interest rate.
Nguyen Hoang Minh, deputy director of the central bank branch in Ho Chi Minh City, said the USD/VND rate is still attractive to overseas remittances, and easy remittance transfers encourage inbound remittances as well.
Overseas remittances to Ho Chi Minh City were estimated at 3.25 billion USD in the first nine months of this year and are projected to hit 5.5 billion USD in the whole year, Mr. Minh said.


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