Vietnam has reasons not to sharply devalue the dong
29-08-2015 15:34:26+07:00
Vietnam has reasons not to sharply devalue the dong
If Vietnam devalues the dong sharply, regulatory agencies will find it difficult to implement the plan to slash medium- and long-term bank loan interest rates, and the public debt will become worse.
Analysts, therefore, have one more reason to criticize the State Bank for keeping the dong/dollar exchange rate stable too long, which they say hindered economic development and exports.
Le Xuan Nghia, head of the Institute for Business Development, noted that while the SBV’s forex trading band widening by one percent on August 11 could be seen as the response to the 4.6 percent Chinese yuan devaluation, the foreign exchange rate adjustment on August 19 serves a long-term strategy.
The central bank will consider the possibility after the US Federal Reserve's (FED) adjusts the prime interest rate in September.
Dau Tu newspaper quoted Nguyen Tri Hieu, a renowned banking expert, as saying that Vietnam should devalue the dong by 10 percent within two to three years. Hieu has called on the State Bank (SBV) to reconsider the strong dong policy.
A member of the National Advisory Council for Financial and Monetary Policies said SBV’s moves in the first half of August would help the GDP grow by 0.5 percent more.
However, analysts said SBV won’t dare devalue the dong too sharply, because the sharp devaluation, if it occurs, will affect the interest rate policy.
BIDV’s Research Center has warned that the central bank will meet with big challenges in implementing its plan to ease the interest rates to make it easier for businesses to access official bank loans.
BIDV’s analysts believe that in the time to come, the Vietnam dong liquidity will be less, while interest rates in the interbank market would go up again, which would later affect market interest rates.
BIDV thinks it is highly possible that SBV would tighten the monetary policies in 2016, which would push the interbank interest rates up.
SBV is cautious for a number of reasons. Since August 11, the secondary government bond market has turned gloomy with weak liquidity, while investors have shown higher interest in short-term bonds. And the interest rates have increased slightly by 5-10 percentage points.
Also, the public debt remains a problem. Hieu, though advocating the dong devaluation decision, also warned that the public debt would be even worse.
