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No worry about high VND/US$ exchange rate   2008-07-17 - DTCK

Le Xuan Nghia, Director of the Banking Development Strategy Department under the State Bank of Vietnam, said that the high trade deficit, expected to reach $19-20bil in 2008, will not greatly affect the exchange rate.


Exchange rate may be VND17,200/US$1 at the highest


Nghia said:


Le Xuan Nghia: Importers, who have imported too much steel for speculation, now have to re-export the imports.

In the first six months of the year, the trade deficit reached $14.77bil, or 50% of export turnover, and 77% of the expected import turnover in 2008. The high trade deficit has badly influenced the exchange rate, making the exchange rate fluctuate heavily. Investors have rushed to speculate dollars because they believe this will bring more profit than deposits at banks.


It is forecast that the trade deficit will be very high in 2008, which will put hard pressure on the exchange rate. What would you say about the forecast?


Some foreign financial groups, including Goldman Sachs and JP Morgan, recently forecast Vietnam’s trade deficit would be very high in 2008, over $30bil, or 40% of GDP. However, the latest happenings in the national economy have made us believe that the trade deficit will not be as high as forecast.


We believe that the trade deficit will be around $19-20bil, because the credit funding imports is decreasing sharply. In the first six months of the year, banks funded import deals because they had made commitments and they had to fulfill the commitments. Meanwhile, the banks will surely reduce import credit as they have been asked to limit credit growth.


Secondly, importers, who have imported too much material, including steel for speculation, now have to re-export the imports.


Thirdly, enterprises imported a lot of materials for domestic production in the first quarter of 2008 already, and they will not import much more in the second half. The materials imported within a quarter may be enough for use for the whole of next year.


In fact, there is another factor that could increase the trade deficit, the oil price increase. However, the trade deficit has been decreasing sharply, and it will further decrease in the time to come.


As you have said, the most ideal scenario is that the trade deficit will be $19-20bil. How can we arrange enough foreign currencies to offset the excess of imports over exports?


The most important thing in settling the trade deficit is to seek suitable sources to support the foreign currency deficiency caused by the excess of imports over exports. If the deficiency is offset by short-term capital, this would cause the exchange rate to fluctuate. It is safe to offset the deficiency with stable foreign currency sources.


With the trade deficit at $19-20bil, the foreign currency deficiency will be offset by the foreign currencies from three sources 1/ overseas remittance, expected to reach $8bil this year 2/ disbursement of foreign direct investment and 3/ official development assistance, estimated to reach $10-11bil. This shows that the trade deficit can be covered by stable supplies of foreign currencies, not short-term and unstable capital. Therefore, I don’t think there will be bad and uncontrollable impacts on the exchange rate.


You may see that the gap between the exchange rate applied in the interbank market and the black market has been narrowed. This has a very important significance in macroeconomic stabilising, because people’s psychology plays a very important role in fighting inflation.


Meanwhile, foreign currency liquidity has been stabilised. The State Bank of Vietnam has announced the foreign currency reserve of $20.7bil. However, if counting the foreign currencies now put under the control of the Ministry of Finance, the foreign currency volume would be higher than the declared figure. As such, I can say that the liquidity proves to be stable, which makes Vietnam capable of keeping the exchange rate stable, at least from now to the end of the year.


Which measure do you think should Vietnam prioritise: cutting expenditures or limiting imports?


In order to reduce the trade deficit, we need to tighten monetary policies, cut expenditures and reduce the state budget deficit. The State Bank of Vietnam is taking drastic measures to tighten monetary policies, while the government is trying to cut down expenditures from the state budget. Meanwhile, measures like forbidding the import of some items or raising import taxes on some items would only bring limited impacts.


The dollar price skyrocketed in the last time partially because of dollar speculation. What should Vietnam do to settle the problem?


Macroeconomic stability will help ease the worries of people, thus helping reduce foreign currency speculation. It is highly possible that the CPI will not increase sharply in the coming months due to the big inventory commodity volume. Bank credit growth has slowed down since July 2008, while total liquidity in 2008 is expected to be equal to ¼ of that of last year.

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