VND/US$ exchange rate stable until year-end

Big international institutions all share the same view that the VND/US$ exchange rate will keep stable in the last part of the year as in the previous three years.

The strong flow of foreign capital into Vietnam over the last time has put pressure on the local currency, forcing the VND to revaluate. However, the fact that the State Bank of Vietnam is trying to buy more foreign currencies has helped stabilise the exchange rate.

According to Citibank, in 2004-2006, the VND lost 0.8-0.9% in value every year. However, the local currency unexpectedly revaluated in the first two months of 2007. The revaluation of the local currency halted in subsequent months; however, the local currency has revaluated again in the last three months, by 0.6% against the greenback.

The current exchange rate is VND16,138/US$1, which is lower than the rate seen in January 2007 (VND16,142/US$1), but higher than the VND16,060/US$1 level in mid February 2007.

The fact that the central bank bought dollars in large quantity in the last time has helped reduce the supply of foreign currencies on the market. This is considered the main reason that the greenback has recovered. The central bank has confirmed that it will continue buying foreign currencies in order to raise the foreign currency reserve and ensure the devaluation of the VND of 1% in 2007 as previously targeted.

Therefore, the reports by Citibank, HSBC, Standard Chartered all said that the VND would slightly devaluate in the short term. However, as the surplus in international payment balance remains high thanks to the big capital inflow (foreign direct investment FDI), overseas remittance and portfolio investment, this will maintain the pressure on the local currency.

Experts have voiced their concern about the increased supply of money on the market as the central bank is trying to buy more foreign currencies. In fact, in order to buy a big volume of foreign currencies, the central bank will have to put a big volume of VND into circulation, thus making it more difficult to realise the goal of curbing inflation.
In fact, international financial institutions, including the World Bank (WB) and International Monetary Fund (IMF), warned about the impact of the foreign capital flow on the monetary policy management earlier this year. WB even said that the investment flow would challenge the monetary policy.

It seems that the central bank has to do two works that may conflict with each other: putting more money into circulation to buy foreign currencies for reserve, while tightening the monetary policy to curb inflation. Therefore, every solution should be considered thoroughly to ensure reaching both purposes.

Most recently, the central bank has decided to raise the compulsory reserve ratio to 10% for bank deposits, a move aiming to tighten the monetary policy and withdraw money from circulation. However, the effects of the decision will only be clear in some months.

Source: VNE