Experts say the new mechanism for exchange rate introduced by the State Bank of Vietnam (SBV) has created flexibility, enabling both credit institutions and enterprises to exercise greater control over their business operations.

The SBV unveiled a flexible dong/dollar exchange rate mechanism on December 31 under which it will set the reference rate every day, instead of leaving it untouched for a long time as it did hitherto.

The trading band continues to be plus or minus 3%.

The SBV has also instructed banks not to lend foreign currencies including the dollar, only sell them.

On December 5, a day after the new policy came into effect, the inter-bank reference rate increased marginally to VND21,907 to the dollar.

Many bankers said the number of transactions on that day remained steady with the forex rate quite a bit below the upper ceiling price.

SBV executives said the flexible approach would enable it to achieve its management objectives while letting the currency move based on global market fluctuations.

The move was only one of several measures to strengthen the role of the Vietnamese currency and steady the forex market by making dollar hoarding and speculation unremunerative.

Analysts have hailed the new mechanism as a move that effectively scuttles the rigid control the bank exercised over the years and is necessary to ensure competitiveness amid the country's deeper integration.

It would closely track developments both at home and abroad, helping the central bank proactively adapt to changes, they said.

Some also said the new policy would reduce the high expectations surrounding the greenback and increase people's confidence in the dong.

But businesses are a bit more wary.

Most prefer a stable exchange rate regime since it helps them better control costs.

They said the imminent volatility would force them to keep an eye on market developments, and, to hedge risks, use derivatives.

In fact, according to SBV statistics, already the value of US dollar forward contracts has skyrocketed from around US$10 million a day to US$100-200 million after the central bank implemented a series of anti-dollarisation measures.

But companies are unhappy with current regulations that do not allow buyers of US dollar forward contracts to cancel them, complaining this places them at high risk.

They want banks to diversify forward trading to create more options for them.

Hot topic

Early last July news that foodstuff maker Kinh Do Joint Stock Company planned to invest VND1 trillion (US$4.4 million) in Dong A Commercial Joint Stock Bank when the latter issued shares to increase its chartered capital from VND5 trillion to 6 trillion, became a hot topic.

For Kinh Do it would not be the first investment in the financial sector. In 2007 it signed a strategic co-operation agreement with Eximbank and invested US$90 million in it.

Analysts said that the banking sector had been going through a comprehensive restructuring, with a series of State firms pulling out their investments in banks on the Government's orders.

This created a slew of opportunities for private players to enter the potentially lucrative sector.

The Doji Group, for instance, bought a controlling 20% stake in TPBank.

But not all private investment in the financial sector has been successful: Kinh Do, for instance, had to sell its stake in Eximbank within three years and without a clear explanation, and also quit the plan to buy stakes in Dong A Bank when the lender was suddenly placed on a list of banks under the State Bank of Vietnam's special control.

After being restructured, TrustBank was bought out by the Thien Thanh Group and some other investors, and renamed Viet Nam Construction Joint Stock Bank. But the bank went under and was finally taken over by the central bank at zero price.

Besides, the Viet Phuong Group has not been able to realise its plan to increase Viet A Bank's chartered capital from VND3 trillion ($133.33 million) to VND4 trillion (US$177.77 million) even five years after buying a 17% stake from State giant SJC.

Analysts attributed private investors' failure in the banking sector to several reasons, but said the main ones are the difficult economic situation and banks' high bad debts.

VNS