Currency stability requires more than just market quick fixes: economists

By Ngan Anh, Thanh Nien News

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To prevent dollarization, the most important is to increase the confidence in the dong, experts say. Photo: Ngoc Thang To prevent dollarization, the most important is to increase the confidence in the dong, experts say. Photo: Ngoc Thang

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The State Bank of Vietnam (SBV) has made several moves over the past weeks to curb dollar hoarding, but experts warn that those short-term measures will only have limited effects on shoring up confidence in the dong.
They said cutting dollar deposit rates or tightening control over foreign currency transactions could stabilize the forex market for now.
But anti-dollarization efforts only pay off when the public trust in the local currency is significantly improved by a stronger fiscal policy to curb debt and overspending, they said, warning the central bank against tapping the national forex reserves. 
To avoid dollar hoarding, the central bank regulates that businesses, from October 5, can only receive dollars they buy from commercial banks two days before they actually need to pay their foreign partners. Individuals and businesses who want to buy foreign currencies from banks are required to present papers and documents showing the purpose, the amount, and the time they plan to spend the currencies.
The regulation came only a week after the central bank, to increase the attractiveness of the dong and prevent dollarization, reduced the interest rates on dollar deposits offered by banks to organizations and companies to zero percent from 0.25 percent previously. The interest rate ceiling on dollar deposits by individuals was also cut to 0.25 percent from 0.75 percent.
The move is expected to encourage people to sell foreign currencies to banks instead of depositing them.
Former governor of the central bank Cao Sy Kiem said the dollar has recently strengthened over other currencies, encouraging people and enterprises to hoard dollars, not only for payments, tourism and studying abroad, but also for profits.
Thus, the measures could help Vietnam quickly prevent dollar hoarding and ease pressure on the exchange rate, he said.
An executive of a commercial bank who requested anonymity said many enterprises and individuals have accumulated dollars for profits and as a safety buffer. They are expecting the dong to fall further amid anticipations of a new rate hike by the US Federal Reserve. 
In September Ho Chi Minh City-based commercial banks saw a month-on-month increase of 9.1 percent in dollar deposits from enterprises, and 5 percent in deposits by individuals, local media reported, citing statistics from the central bank’s city branch. Those rates were much higher than growth of between 0.4 and 0.7 percent seen in previous months. 
Demand for the greenback has increased, putting pressure on the dollar supply of commercial banks, especially small ones, another banker said.
“If the measures to deal with the issues are not soon taken, the forex market will react negatively to the impression that there's a scarcity of dollars,” he said.
Short-term effects
On September 29, one day after the State Bank of Vietnam lowered the dollar deposit interest rates, the amount of foreign currencies bought by commercial banks in Ho Chi Minh City rose 2.7 times over the daily average level of the previous 10 days.
However, such administrative measures have run counter to market rules and they are unlikely to have long-term effects, said economists.
The measures could work for a while, but in a long term, they could harm the economy, they said.
Economist Nguyen Tri Hieu said dollar depositors might choose to send their savings to other countries to benefit from higher interest rates. If that happened, the central bank's policy would have the opposite effect on the market. 
“To prevent dollarization and stabilize the forex market, the most important thing is to increase confidence in the dong,” Hieu said.
Vietnam needs to remain a low and stable public debt ratio, and create a strong financial market, he said.
SBV's Deputy governor Nguyen Thi Hong has recently said Vietnam will not make any further changes to the exchange rate in 2015 after three devaluations this year.
On the interbank markets the dong was traded 21,890 per dollar on Tuesday, down from 22,547 on August 25.
The dong has lost around 5 percent so far this year, breaking the 2 percent target set by the central bank. 
In a recent report, HSBC said the central bank obviously has its forex reserves which it can use to maintain some currency stability.
But even though the State Bank of Vietnam has improved its forex cover, its reserve adequacy is already low by most conventional measures, the report said. 
If the forex reserves are used for financing government projects, this would leave the central bank with less ammunition to help it stick to its commitment, it said. 
The State Bank of Vietnam has recently announced that it offered the Ministry of Finance a VND30 trillion (US$1.31 billion) loan as budget shortfalls have become an issue amid weak bond sales. 

Forecast
HSBC said the dong will weaken, but not "aggressively," noting that the Vietnamese economy has actually been one of the bright spots in Asia, with stronger domestic demand and low inflation. 
Vietnam’s high external debt limits the room for the central bank to let the currency weaken too fast, it said.
“As such, we have decided to revise our forecast and now expect the dong to depreciate against the dollar by an additional 2 percent in 2015, and then a further 2 percent in 2016,” HSBC said.
“Our year-end forecast for dollar-dong is 22,800 for end 2015 and 23,300 for end 2016.”
Economist Hieu warned against using the forex reserves to stabilize the market.
He agreed that even after increases, the reserves are still low, especially in the context of growing imports 
Vietnam is expected to spend $173.billion on imports this year. The traditional benchmark for forex reserves is equivalent to three months of imports.
Vietnam's foreign exchange reserves have increased 2.7 percent to US$37 billion so far this year, Governor Nguyen Van Binh of the central bank said recently.
The figure could reach $40 billion if other items, such as gold reserves, which were estimated at 10 tons, and deposits in foreign currencies by the State Treasury and credit institutions at the central bank are included, he said.
In the long term, Vietnam should move toward a floating exchange rate as it continues to ease restrictions on capital flows across the country’s borders, Hieu said.
The shift will be necessary as the country strives to meet its international commitments and will naturally force the exchange rate to be regulated by the market, he added.

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