VietNamNet Bridge – Economists believe that widening the VND/US$ exchange rate trading band now would help ease dollar hoarding and boost exports. However, Vietnam’s central bank is not yet convinced.

Will devaluing the dong rescue exports?

In its assessment of export prospects, The National Socio-economic Forecast and Information Centre (NSFIC) has predicted continued unsatisfactory export performance if the State Bank of Vietnam does not adjust the dong-dollar exchange rate.  NSFIC argued that the trading band should be widened to six or seven percent from the current level of five percent.

NSFIC, a unit of the Ministry of Planning and Investment, says it is likely that 2009 will be the first year in the doi moi (renovation) period (i.e., since 19##)  that Vietnam’s total exports will fall.  It believes that the adjustment of the exchange rate will help ‘rescue’ exports.

The experts at NSFIC argue that exchange rates are an important factor that affects export. Vietnam has kept the exchange rate stable against the dollar, which is believed to have made the dong become overvalued.  In principle, when the local currency is overvalued, exports weaken and imports rise to a level which may threaten local production.

Several months ago, the State Bank of Vietnam decided to raise the trading band from one percent to the current level of five percent. This, by nature, is tantamount to devaluing the local currency gradually, which is believed to help boost exports.

The five percent trading band means that the exchange rates applied by commercial banks in their transactions must not be higher or lower by five percent in comparison with the official interbank exchange rate announced daily by the State Bank of Vietnam.

Associate Professor Nguyen Thi Mui from Vietinbank also believes that widening the trading band will help settle the current dollar supply and demand imbalance.

Currently, banks have an abundance of dollar to lend but cannot find borrowers, while they do not have dollars to sell, though they have a lot of buyers. And it is all because of the exchange rate. Banks have lots of dollar to lend because people prefer to hold dollars.  They deposit their money in dollar-denominated accounts instead of dong accounts when they think the dollar will gain value against the dong. Meanwhile, banks do not have dollars to sell, because they cannot purchase dollars from export companies which also think that the dollar will keep rising.

Mui said that if there is an adjustment to the dong/dollar exchange rate that raises the dollar price increases to the expected levels, export companies will sell dollars to banks instead of keeping dollars in their accounts. This will help ease the current dollar shortage.

The central bank isn’t so sure

Responding to the calls for a wider trading band, Governor Nguyen Van Giau of the State Bank of Vietnam said that the bank still needs to think carefully before making any decision relating to the exchange rate adjustment.

Giau pointed out that a five percent drop in the exchange value of the dong would raise the cost of debt management to the state budget by 26 trillion dong annually, and to businesses by 13 trillion dong more.

Giau said further that devaluation of the dong may not be an optimal solution to boost exports, because Vietnam has to import 80 percent of the materials needed to make the exports. If the dong loses its value, businesses will have to spend more money to import materials, which will raise production costs.

In 2008 that many businesses which reported profits in the third quarter saw them turn to loses in the fourth quarter because of the exchange rate fluctuation. The debt service for the Pha Lai Thermal Power Plant last year increased by 800 billion dong because of the exchange rate increase.

General Director of Lien Viet Bank Nguyen Duc Huong said that though the central bank needs to regulate the exchange rate in a flexible way, it should also thoroughly consider the exchange rate in relation to important factors of the national economy, including import, export and investment.

Phuoc Ha

Please send us your comments and feedback: