Vietnam rules out dong devaluation; state bank to sell dollars

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Vietnam will not adjust the dong's exchange rate against the U.S. dollar or change the local currency's trading band, Le Duc Thuy, Chairman of the National Financial Supervisory Commission, said in Hanoi Thursday.

"That will be from now to the Lunar Tet holiday," Thuy told reporters. "We will see how the market situation with the dollar and consumer prices is during the Tet and then will have suitable measures." The Lunar Tet holiday is in February.

The Southeast Asian nation is facing pressure to weaken the currency as its trade deficit widens and the dollar surges in the so-called black market, said Vu Anh Duc, an analyst at Vietnam Joint Stock Commercial Bank for Industry and Trade, known as Vietinbank. The State Bank of Vietnam has devalued the dong three times in the past year, allowing the currency to drop 8.4 percent against the dollar in that time.

"Adjusting the dong's exchange rate now is not helpful, it could cause some negative domino effects" and "pare people's confidence in the dong," said Thuy, a former central bank governor. The State Bank of Vietnam will "intervene" in the market by selling dollars to boost the availability of the currency, according to a statement published Thursday on its website.

Thuy said the nation's foreign-exchange reserves increased by $300 million in September, though he declined to give a figure for the total. The holdings peaked at $23 billion in recent years and are "now equivalent to six to seven weeks of imports," he said, adding that they are sufficient to meet current demand for the greenback.

Devaluation, deficit

The dong was trading at 19,495 in the spot market as of 4:20 p.m. in Hanoi, according to data compiled by Bloomberg. The State Bank of Vietnam set the dong's daily reference rate at 18,932, unchanged since Aug. 18. The currency is allowed to fluctuate by as much as 3 percent on either side of that rate.

The dong strengthened to about 20,550 at money changers in Ho Chi Minh City Thursday, from a record-low of 21,070, according to a telephone directory information service, known as 1080, run by state-owned Vietnam Posts and Telecommunications.

Vietnam's trade deficit widened to $1.1 billion in October from a revised $875 million in September, according to preliminary figures released by the General Statistics Office in Hanoi on Oct. 25. The shortfall could total $12 billion to $12.5 billion this year, according to Thuy. That compares with a previous government estimate for imports to exceed exports by as much as $14 billion, he said.

Inflation risk

October's inflation and trade figures highlighted concerns that policy should be tightened to avert a foreign-exchange crisis, Kevin Grice, an economist at Capital Economics, said in a Nov. 2 note. Consumer price growth increased to a 19-month high of 9.66 percent in October, holding above the 8 percent ceiling targeted by policy makers for a ninth month.

"Inflation will exceed the government goal of 8 percent for the whole year," Thuy said. Lenders have been told to boost deposit rates for the local currency to encourage saving and so help contain inflation, he added.

The rates are currently as high as 11 percent at the nation's banks, according to a statement on the central bank's website Thursday.

Vietnamese companies typically require more dollars at year-end to repay foreign loans, pushing up demand for the currency and boosting its value versus the dong in the unofficial market, Duc at the Hanoi-based Vietinbank said.

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