VietNamNet Bridge – In principle, the dong/dollar exchange rate only stabilizes when Vietnam has a large dollar reserve and the trade deficit reduces. However, experts have pointed out that in short term, the temporary dollar shortages should be seen as the result of monetary policies.

Two circumstances, one result

Vietnam witnessed a serious dollar shortage in 2009, when the price skyrocketed at the end of the year.

At that time, the Government introduced the Vietnam dong interest rate subsidy programme. As the result, it became more expensive to borrow in dollar than in Vietnam dong. Vietnamese businesses rushed to borrow Vietnam dong to enjoy low interest rates, and kept dollars in their coffers.

In principle, when the Vietnam dong interest rates go down, this means that the dong loses its values against other currencies, and when the dollar interest rates go up, this means that the dollar increases in value against the dong. This is how the dollar price escalated continuously.

The monetary policy applied at that time made people think that the dollar price would increase. Therefore, they tried to store dollars, leading to the short dollar supply on the market.

The State Bank then had to take a series of measures to cool down the foreign currency market. In particular, it instructed state owned corporations to sell unused dollars to banks.

The situation is different now in 2010. The big gap between the Vietnam dong and dollar lending interest rates in the first months of the year (dollar loans were cheaper than Vietnam dong) prompted businesses to rush to borrow in dollar.

The massive borrowing in dollar has some negativeconsequence. Businesses rushto purchase dollars in the last months of the year to pay back their bank debts when these matured, thus leading to the higher dollar demand and dollar shortage.

Le Duc Thuy, Chair of the Finance Supervision Council, said that the supply-demand imbalance on the foreign currency market was caused by the sharp increase in the demand for dollars,
As such, the dollar increases occurred twice in the last two consecutive years, even though the market conditions were quite different. And this has been blamed on the monetary policies.

US$ outstanding loans go a bit too far

By October 14, the outstanding loans in dollar had increased by 52 percent from the beginning of the year. Meanwhile, Vietnam dong outstanding loans had increased by 14.6 percent, and the total outstanding loans by 21.3 percent.

It is clear that the 52 percent growth rate in dollar loans is a worrying figure.

In fact, experts have been warning about the too sharp increase in the dollar outstanding loans for a long time, saying that the high ratio of outstanding loans would put a hard pressure on the dong/dollar exchange rate later.

The dollar deposit interest rates have been increasing sharply these days, since banks are trying to mobilize more capital in order to meet the increasingly high demand for dollar loans.

The exchange rate has been pointed as the biggest worry for Vietnam’s national economy in the last months of the year. The high demand for dollar for import deals and the matured dollar loans will surely put pressure on the exchange rate.

Policy makers subjective or lack suitable strategies?

Despite the warnings, the State Bank still believes that the dollar outstanding loans only increased sharply if compared with 2009, the time when businesses did not want to borrow in dollar, because they preferred dong loans with interest rates to dollar loans.

The central bank also said that the dollar supply from kieu hoi (overseas remittance) and foreign direct investment is profuse, and there was nothing to worry about.

However, the worse-than-expected thing happened: the dollar price has been escalating, which has forced the Government to apply a lot of measures to intervene in the market.

Commenting on these measures, economists say that Vietnam still cannot solve the problems thoroughly.

It has become a common situation that the dollar price escalates step by step, and then the State Bank tries to reassure the public that the dollar price increases just because of speculation and that people should keep calm.

However, just several days later, the State Bank decides to adjust the dong/dollar exchange rates.

As the result, people gradually lose their confidence on the statements issued by the management agencies. What happened makes them think that the policies always lag behind the happenings in the market.

It is true that the dollar price increases because of the speculation. However, one should understand that speculation exists in every market. The most important thing policy makers should dos is to set up necessary regulations so that people no longer engage in speculations. This is the art of management.

Le Khac