Vietnam dong advances, stability expected

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A commercial bank employee counts US dollar notes at a branch in Hanoi

The Vietnam dong is appreciating and is forecast to remain stable this year amid weaker demand for dollars and greater supply of the currency.

Leading commercial lender Vietcombank set the exchange rate for the US dollar at VND20,800-20,850 Thursday, compared to the rate of VND 20,936-21,036 on January 31. The central bank set the reference rate at 20,828, unchanged since December 26, its website showed. The currency is allowed to trade as much as 1 percent on either side of the official rate.

On the so-called black market, the dong traded at around 20,820 per dollar at gold shops in Hanoi on Thursday, compared with between 21,010 and 21,040 on February 1.

Nguyen Van Nam, former head of the Institute for Trade Research, said the narrowed trade deficit may boost confidence in the nation's economy and the dong.

The country's trade gap narrowed to US$100 million in January, compared with a revised deficit of $269 million in December, as imports declined to $6.6 billion from $9.36 billion, according to the General Statistics Office.

"Demand for the dollar at trading companies has decreased," he said, noting that many firms dealing in raw materials for the steel, seafood, footwear and garment sectors have reduced their imports as domestic consumption declined.

"Obviously, the local economy is showing signs of weakness, as the demand for imports is down," he said.

Can Van Luc, adviser to the management board of state-owned lender BIDV, said the dollar demand for gold imports has recently declined, reducing the pressure on the exchange rate. The gold market has remained stable after some commercial banks were allowed to trade the precious metal via their accounts, and sell their gold in stock, he said.

While the demand for the greenback has gone down, supply climbs supported by foreign direct investment and official development assistance (ODA) inflows, contributing to the decrease of dollar prices on the local market, he said.

Luc said the biggest-ever overseas remittances in 2011 have also increased Vietnam's foreign currency supply.

Overseas remittances to the country reached some $9 billion in 2011, compared to $8 billion the previous year, according to bank reports.

A representative at a commercial bank in Hanoi said dollar trade at his bank is now doubling that of late last year. Companies and local people have sold their dollars to the bank to get the dong, as the interest rates on the local currency are much higher than that of dollar. This has pushed the dong value up.

The annual deposit interest rate on the dong is capped at 14 percent, while that on the dollar is 2 percent.

The representative said his bank now could easily meet its customers' demand for foreign currencies. "Earlier, we could only prioritize dollar sales for some customers due to limited supply. Now, all our customers' demands can be met. We buy a lot of dollars."

Under control

Economist Vu Dinh Anh said demand for the dollar this year is not as high as previous years because speculation demand for foreign currencies will weaken as the nation's imports slow and the trade deficit narrows.

"If inflation was controlled at 10 percent this year, the dong may be devalued by 2-3 percent," he said.

Governor of the State Bank of Vietnam Nguyen Van Binh said the dong may fall between 2 percent and 3 percent this year. That compares with a 7.4 percent drop against the dollar last year.

Vietnam is targeting a balance-of-payments surplus of $3 billion in 2012 and enough foreign-exchange reserves to cover 12 to 15 weeks of imports by 2015, he said last month.

Consumer price growth in 2012 may be less than 12 percent at worst and 8.5 percent to 9 percent in a good scenario, Binh said. Inflation hit 18.58 percent in 2011.

Anh said the foreign currency supply may be supported by FDI this year. Investors are unlikely to withdraw their capital from Vietnam, as the funds are not large enough to help them resolve problems overseas, if any, cause by the global economic downturn.

Meanwhile, FDI disbursements are expected to rise this year, as the capital volume registered in 2009 and 2010 was big, and those projects are now ready for implementation, he said.

Bao Viet Securities forecast that the exchange rate between the dong and the dollar would rise, but remain under control, as the payment balance surplus is estimated at $500 million this year.

"Vietnam would still be an attractive destination to ODA, FDI or overseas remittance in 2012," said a report from the company. "The exchange rate between the dong and the dollar may rise by 3 percent to VND21,700-22,100 per dollar this year."

"The trade deficit has been gradually narrowing in recent years," researchers Tai Hui, Jennifer Kusuma and Thomas Harr at Standard Chartered Plc in Singapore wrote in a recent report. That means "more support for the Vietnam dong, at least in the short term," they wrote.

Standard Chartered revised its forecast for the exchange rate by the end of the year to 21,700 from 22,600, reported Bloomberg on February 8.

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