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Problems latent behind the dong/dollar exchange rate stabilization   2012-04-10 - VnMedia

The dong/dollar exchange rate stabilization for a long period has been hailed as the result of the great exertion by the State Bank to stabilize the foreign currency market. However, experts say they still can see latent problems.

 

By April 5, 2012, the dong/dollar exchange rate had been stabilized for 80 consecutive days. The interbank exchange rate announced by the State Bank of Vietnam was kept unchanged, while the exchange rates quoted by commercial banks were also stable on the day. Only Vietcombank’s dollar price increased very slightly at the end of the day.



In fact, the dong/dollar exchange rate has been stable for the last six months. The State Bank of Vietnam succeeded with its management policies, restoring the confidence in the Vietnam dong value, thus allowing to avoid the chaos which occurred sometimes in previous years.



In the context of the exchange rate stabilization, Governor of the State Bank Nguyen Van Binh was self-confident to state that in 2012, the dong/dollar exchange rate would not fluctuate by more than two or three percent.



However, it is obvious that one should not expect to see the perfection in any policies. There’s always the other side of the coin, and latent problems behind the exchange rate stabilization have been found.



Two different agencies, the National Assembly’s Economics Committee and the National Finance Supervision Council, have shown their worries about the same problems hidden behind the exchange rate stabilization.



In a report released late last week, the National Assembly’s Economics Committee recommended that the exchange rate should be operated in a flexible way, and that it is not advisable to maintain narrow trading bands for the exchange rates, because this would narrow the effected areas of the monetary policies, badly affect the exports. Especially, a rigid operation way may pave the way for the hot money to flow to Vietnam.



Though the recommendation was just in a few words, it shows many implications. The State Bank has committed that the exchange rate would not fluctuate by more than 3 percent in 2012, which means that the policies would be designed in a way to ensure to fulfill the task.



And one of the things that the bank needs to do to implement the task is to reduce the Vietnam dong interest rates. However, if the interest rates are lowered too sharply and rapidly, this would lead to the bad effects to the exchange rate performance.



The National Assembly’s Economics Committee has every reason to worry about the impacts of the foreign hot money flow. The current environment is encouraging the cash flows. However, if any signs of changes appear, this may put a hard pressure on the exchange rate.



The same viewpoint has also been mentioned by the National Finance Supervision Council.



The council also said that the exchange rate stabilization would restore people’s confidence on the dong and help curb inflation. However, in the current conditions, when there still exists a big gap between the dong and the dollar interest rates, the stabilization may create an arbitrage flow to Vietnam under the two modes – portfolio investment and foreign short term loans.



The capital inflow would help increase the foreign currency supply, thus giving more favorable conditions to stabilize the exchange rate and increase national reserves. However, this is the short term capital flow, and investors may withdraw the money at any time. Once the hot money outflows from Vietnam, this would cause risks in the medium term, if the portfolio investment volume is big in comparison with the national reserves.



Besides, the council said the real multilateral exchange rate REER is 94.56, which means that the dong is overvalued by 5.46 percent, which could be seen as a disadvantage to Vietnamese goods in the international market.



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