Shrewd trades buoy VN foreign reserves

Shrewd trades buoy VN foreign reserves

Viet Nam's foreign reserves have surged to US$23 billion, equivalent to 11.5 weeks of imports, according to a member of a research team from the Bank for Investment and Develop-ment of Viet Nam (BIDV).

The State Bank of Viet Nam has been buying up foreign currency each month since the beginning of the year, even soaking up over $600 million last month after the arrests of two leading figures in the banking industry sent shockwaves through local markets. On August 23, the State Bank lifted nearly all remaining policy barriers to encourage the selling of foreign currencies to banks.

A shrinking trade deficit has also helped strengthen reserves and stabilise exchange rates. Imports in the first half of the year totalled $53.7 billion while exports were $52.9 billion.

Weakening imports therefore resulted in a trade deficit of just $800 million during the period, far below last year's $9.84 billion level. Disbursements of foreign investment have also contributed $5.4 billion in foreign currency to the local economy, while remittances from abroad brought in another $4 billion and disbursements of official development assistance (ODA) another $600 million.

The slowed pace of imports also reflects diminished economic activity. Government policies to curb inflation and tight credit have restrained growth.

The State Bank is aware of the dangers of higher inflation in the closing months of the year, as well as higher imports and a wider trade deficit, as construction and consumer spending increases before the Tet (Lunar New Year) holiday.

Together with the narrowing gap between interest rates paid by banks on deposits in domestic and foreign currencies, higher inflation could encourage more people to hold onto foreign currency.

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