Devaluating dong now would burst everything into flames
Devaluating dong now would burst everything into flames
The dollar prices quoted by commercial banks since the beginning of June have always been hitting the ceiling levels. Is it now the time to adjust the dong/dollar exchange rate?
It’s obvious that the dong/dollar exchange rate is under a hard pressure, though some state officials say the dollar price increases are just temporary, which would in no way affect the exchange rate.
On June 22, the selling dollar prices quoted by commercial banks, also hit the ceiling level of VND21,036 per dollar. Meanwhile, the buy price was quoted at VND21,025 per dollar. On the black market, the dollar price has been increasing sharply, sometimes hitting the VND21,400 per dollar threshold.
Exchange rate bears hard pressure
At the beginning of the year, Governor of the State Bank of Vietnam -- Nguyen Van Binh, stated that the dong value will not lose more than 2-3 percent of its value in 2013.
By mid-June 2013, the banks’ average buy prices had increased by 0.9 percent in comparison with the beginning of the year. However, the dollar prices have witnessed several sharp rises so far this year.
Especially, the upward trend has been seen since early April, partially because of the people’s worries about the exchange rate adjustments, and partially because of the higher demand amid the returning of the trade deficit.
In the first half of June 2013, the dollar prices in the black market many times hit the VND21,400 per dollar threshold, while the prices quoted by commercial banks have always been hitting the ceiling level at VND21,036 per dollar.
Dr. Nguyen Tri Hieu said there are many factors that push the dollar demand up, including the higher imports of materials for domestic production, the government’s demand for dollar to pay foreign debts. The dollar price increases have also been attributed to the speculation. People rush to buy dollars for the fear about a possible exchange rate adjustment.
The overly big gap between the domestic and the world’s gold prices, about VND5-6 million per tael, has also stimulated the demand for dollars to import gold through unofficial channels.
Pham Hong Hai, a senior executive of the Hong Kong and Shanghai Banking Corporation HSBC, said the reasons behind the dollar price increase includes the fact that portfolio investors now try to sell dong bonds to buy foreign currencies when the government bond yield has decreased rapidly recently.
Hai has noted that when seeing the dollar price increase and the weak market liquidity, though the problems are just temporary, enterprises, including those, who still do not need foreign currencies immediately, rush to buy foreign currencies, while others try to hoard foreign currencies instead of selling them.
Observers have noted that the gap between the buy and sale prices quoted by commercial banks is very small, just VND1 dong per dollar. It’s obvious that the small margin is not big enough for banks to cover expenses.
If the problem cannot be settled, it may happen that banks would, once again, dodge the laws by collecting additional fees to make the actual selling prices higher than the ceiling levels.
Though seeing the pressure on the exchange rate, Hieu thinks it would be very dangerous to devaluate the local currency at this moment, because this would “burst everything into flames.”
Analysts believe that it would be better to widen the trade band from one percent to 2 or 3 percent, i.e. that banks can set up their prices higher or lower by 2 or 3 percent than the dollar prices announced daily by the State Bank of Vietnam.
vietnamnet
