Wednesday, December 27, 2006

VND to revaluate?

Experts have warned that the local currency is under a hard pressure which may cause the revaluation of the currency.

How to sell dollars?

Commercial banks now do not have enough VND to buy foreign currencies, which should be seen as an abnormal phenomenon. If the situation cannot be improved, it would lead to the unwanted increase of the VND in value, thus severely affecting exports.

In mid November, the VND/US$ exchange rate offered by Vietcombank HCM City Branch was VND16,100/US$1. People thought that the VND would lose its value against the dollar as they saw in the last years. However, contrary to al predictions, the dollar is losing its value against the VND. On December 22, the bank listed its official exchange rate at VND16,067/US$1, lower the rate quoted in mid November, and lower than the inter-bank rate declared by the State Bank of Vietnam (SBV).

In fact, the dollar purchasing prices offered by commercial banks are calculated by the sum of the inter-bank rate plus 0.25%. The inter-bank exchange rate announced on December 22 was VND16,088/US$1, and the banks could buy dollar at VND16,128/US$1, while they just offered at VND16,067/US$1.

Director of a commercial bank said that banks now only purchase foreign currencies from export companies. As for other clients, who want to sell dollars, the banks delay making deals or lowering the purchasing prices in order to reduce the demand for selling foreign currencies.

The supplies of foreign currencies always increase at the year end, and this also happens this year. Vietnam has exported $36.9bil worth of products so far this year, up by 22.1% over the same period of the last year. Several million US dollars would be remitted by Viet Kieu to their relatives in Vietnam in the pre-Tet months. In addition, the Viet Kieu who return home on Tet will also bring a large sums of dollars with themselves for spending, which will make the dollar supplies profuse.

Analysts said that the demand for selling dollars is increasingly high, while local banks do not have enough VND to buy. Even when banks can arrange enough VND, they still cannot buy as much foreign currencies as they want.

Under the current regulations, the commercial banks only can hold a certain sum of foreign currencies, and they will be punished by SBV, if the foreign currency position in a day exceeds the set level. If the banks buy overly high volumes of foreign currencies, they must sell the exceeded volume to other banks. If they cannot make deals with other commercial banks, the central bank must act as the final buyer of foreign currencies. In the last few days, commercial banks have many times ‘driven through the red lights’, but the central bank has refused to buy the foreign currencies.

Buying foreign currencies or curbing inflation?

Analysts said that the central bank has every reason to refuse to buy foreign currencies at this moment. If it puts more money into circulation, this would leave a hard pressure on inflation that may cause uncontrollable price increases.

Commenting about the VND revaluation, a banking expert said that this just happens in the short term due to the temporary imbalance in supply and demand. In the long term, VND will continue losing its value against the greenback. However, the abnormal phenomenon is not good for the national economy, and the central bank should intervene to stabilise the exchange rate.

The expert said that Chinese reminbi was once threatened to revaluate, and the Chinese central bank had to inject reminbi in circulation to buy foreign currencies. This has helped China to have a huge foreign currency reserve of up to $1,000bil, and made China-sourced export products cheap and competitive in the world’s market.

The expert does not think that it would cause a high inflation if the central banks spend VND to buy dollars. “As the foreign currency reserve is modest, it is a good opportunity to improve the situation,” he said.

Other experts shared the same view, saying that if Vietnam does not buy foreign currencies at this moment, it can control the inflation, but it will have to pay a heavy price for this as Vietnam’s exports would suffer when the VND revaluates.

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