High exchange rate to continue, hurt importers

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The rising demand for foreign currencies needed for imports and loan payments has prompted a higher exchange rate between the dong and US dollar, putting more pressure on local companies already suffering high interest rates.

The demand for dollars is rising on the back of increasing imports of gold and production materials needed for the upcoming holiday season.

Vietnam's central bank weakened the dong-dollar reference rate to 20,738 per dollar on Thursday from 20,733 on Wednesday. The rate is the weakest since 2005, according to Bloomberg data.

Following the adjustment, the dong dropped on both the official and the so-called black market. Vietcombank quoted the dollar at VND20,945 on Thursday morning, compared with VND20,885 a week ago.

Vo Tri Thanh, deputy head of the Central Institute of Economic Research and Management, said the dollar hike was due to the increasing demand for the greenback needed to import gold.

Vietnam imported gold worth US$1.5 billion in the first nine months of this year through September, a four-fold increase over the same period last year, according to the Ministry of Industry and Trade.

The country's large trade deficit is also putting pressure on the exchange rate, he said. The deficit widened to $1 billion last month from the revised $396 million in August, according to preliminary data from the General Statistics Office.

"Pressure on the economy is still strong as inflation is not yet under control. The dong may continue to lose value," Thanh said.

Consumer prices increased 22.4 percent in September from a year earlier after rising 23 percent in August.

Economist Le Dang Doanh said interest rates on dollar loans are much lower than those for the dong, so firms prefer borrowing the foreign currency from banks, which contributes to raising dollar demand.

Annual interest rates on dollar loans are 6-8 percent, while those on dong are 18-19 percent, according to the State Bank of Vietnam.

Many companies with dollar loans may suffer losses if they have to buy dollars to pay matured loans when the exchange rate rises, Doanh said.

Continued rise

Vietnam aims to keep the exchange rate stable until the end of the year, allowing it to move within a 1-percent band, the central bank said in a statement.

"The State Bank of Vietnam and commercial banks will continue selling foreign currencies for market intervention, meeting fully the economy's necessary demand," it said.

A surplus in the balance of international payments, improved state foreign reserves and good liquidity in the banking system will help the central bank keep the exchange rate and foreign exchange interest rates stable, the bank said.

Economists said it would be difficult to keep the exchange rate from rising by more than 1 percent over the next few months. The rate has increased by around 0.5 percent since just early this month.

"The exchange rate may exceed the target of the State Bank of Vietnam because of a high trade deficit and foreign currency credit," economist Doanh said.

Foreign currency loans are estimated at $30 billion, while foreign currency deposits at $22.5 billion only, Le Xuan Nghia, vice chairman of the National Financial Supervisory Committee, said at a meeting early this month.

"Short-term dollar loans often mature in the last three months of the year, pushing demand up on the forex market," he said. "The pressure on the exchange rate will rise, unless the State Bank of Vietnam takes reasonable measures soon."

Hurt importers

Dao Duy Kha, deputy general director of the Vietnam Plastic Corporation, said many plastic importers are struggling with falling sales and higher exchange rates.

"The situation has never been so bad as now," he said. His firm's plastic material sales on the domestic market dropped by 50 percent last month over a year earlier.

Worrying about higher exchange rates in the coming months, many plastic importers have stopped buying materials.

Le Van Hung, manager of an electronics shop in Hanoi's Hai Ba Trung District, said his shop has not yet increased its retail prices. But if the exchange rate continues to rise, it may have to consider adjusting prices as most of its products like TVs, laptops and fridges are imported.

"The higher exchange rate may deal a big blow to traders, who inherently faced difficulties due to high interest rates and low purchasing power sparked by high inflation," he said.

Sacombank Securities Company said in a report last week that it's not expecting any dong devaluation. As the central bank aims to keep the dong stable, there won't be another one-off devaluation this year. The central bank will likely tap its foreign exchange reserves, the company said.

News website VnExpress reported on Monday that the central bank's dollar sales totaled $150 million in the first week of October.

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