Vietnam Weakens Dong Further as New FX Mechanism Adopted

Tuan Minh

10:49 05/01/2016

BizLIVE - The Vietnamese banking authority weakened the daily fixing of the dong for the second straight day as it has adopted a more flexible float forex policy amid uncertainties in the global financial market.

Vietnam Weakens Dong Further as New FX Mechanism Adopted

Vietnam's interbank rate weakened for the second day on Tuesday after the new mechanism was adopted. (Photo: Internet)

The State Bank of Vietnam (SBV), the country’s central bank, set the interbank rate for U.S. dollar/dong transactions at 21,907 on January 5, 0.05% lower than on January 4, when it started to announce the reference rate on a daily basis.
“With the new FX methodology, instead of one-off devaluations as seen in the past, we could see the central bank guiding dollar/dong gradually higher over time,” Reuters cited an ANZ report as saying on Monday.
The SBV weakened the reference rate three times with 1% each and widened the trading band of the dong twice to +/-3 in 2015 to shake off adverse effects from the strengthening of the U.S. dollar and a surprise devaluation of the Chinese yuan.
Keeping the forex market steady caused Vietnam’s foreign currency reserves to drop by $6.7 billion to $31 billion at the end of September 2015, according to data of the International Monetary Fund (IMF) quoted by HSBC.
More Market-based Mechanism
The SBV will set the daily reference rate based on a weighted average of dong prices in the interbank market the previous trading day, prices of eight major foreign currencies at 7 a.m. Hanoi time, and macroeconomic movements at home, Bui Quoc Dung, head of the SBV’s Monetary Policy Department, said at a press briefing on Monday.
 Bui Quoc Dung, head of the SBV’s Monetary Policy Department, speaks at a press briefing in Hanoi on Monday. (Photo: VnExpress)
The eight currencies are the U.S. dollar, the Chinese yuan, the euro, the Japanese yen, the New Taiwanese dollar, the South Korean won, the Thail bath and the Singaporean dollar, he said.
“The methodology based on the three factors will ensure the flexibility of the forex rate and mirror domestic and international changes,” Mr. Dung added.
The official revealed that the banking regulator has allowed three-month forward sales of U.S. dollars to commercial banks at the daily rate plus an additional 1% to help them balance their forex positions.
“Instead of a rigid trading band, this method implies that the USD/VND rate is targeted to change 1% throughout March 2016,” Mr. Dung added.
Speaking at the briefing, Deputy SBV Governor Nguyen Thi Hong stated that the new mechanism was a managed float forex regime. “The new management mechanism will control the volatility of the forex rate,” she said.
The USD/VND rate can still move +/-3% around the interbank rate, Ms. Hong said, asserting that the SBV will stick to its target of pursuing the stability of the forex market and macroeconomic fundamentals, upholding the Vietnamese dong and supporting economic growth.

New Mechanism Likely to Hamper Stock Market

Nguyen Thi Thuy Linh, director of macro and financials at VPBank Securities Company (VPBS) told BizLIVE that the USD/VND rate will move frequently in both directions following the new mechanism.
The interbank rate will be revised with more flexibility on the back of international money-market movements and speculation. This will benefit Vietnam’s exports while importers will be losers.
With the forex rate becoming unpredictable, businesses without revenues in U.S. dollar will have to limit foreign currency borrowings. This will also hamper foreign indirect investment inflows into Vietnam, thus exerting a negative impact on the local stock market.
VPBank Securities Company cited a study in 2010 by Vietnamese researchers as saying that the then forex mechanism would not help Vietnam curb inflation or narrow the trade deficit. The researchers recommended Vietnam adopt a managed float forex mechanism.
Such a mechanism would help domestic consumer prices in Vietnam move in alignment with global prices. In addition, it will help the nation shield from external money and commodity shocks.
The managed float forex mechanism requires the central bank to be independent, according to the study.
The VN Index of the Hochiminh Stock Exchange slid 0.42% to 572 at 10:40 on Tuesday, following a 0.8% decline on Monday caused by broad-based selloffs in Asia.