Forex hike not unexpected

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The Vietnamese dong has weakened after holding steady for months against the dollar, following a gold hoarding panic over the weekend. Commercial banks lowered the dong against the dollar on Thursday, increasing the exchange rate to 20,824 per dollar from 20,660 on Sunday.

Economist Le Tham Duong of the Ho Chi Minh City Banking University explored the bigger picture in an interview with Thanh Nien Weekly.

Thanh Nien Weekly: The exchange rate between the dong and dollar has sharply increased over the past few days. Is this a short-lived and/or a logical development?

Le Tham Duong: It would be unusual only if the exchange rate did not increase. We have forecast the exchange rate hike since last month, and the state has been prepared to cope with the situation by adding nearly US$5 billion to its foreign reserves this year. The State Bank of Vietnam has also asked state-owned conglomerates to sell their dollars to banks. It has also required commercial banks to reduce their dollar holdings to lower foreign currency hoarding. The three measures are very active at present.

The exchange rate was expected to surge late this year, as trade deficit rises because of higher imports to serve increasing production and business, and dollar credits of commercial banks quickly soared, making borrowers buy the greenback to pay loans.

However, gold prices have soared in an unpredictable manner over the past few days, and gold may be smuggled or hoarded, creating pressures on the exchange rates. The rates continued to increase just after the central bank announced it would allow gold imports. Thus, dollar prices will increase in the context that gold is imported and smuggled, and when world gold prices tend to rise.

We have forecast the dollar price hike, but we expect that it will rise gradually, not suddenly as it has happened now. Thus, this dollar hike will be a short-lived reaction to soaring gold prices.

Has the dollar hike happened also because firms have strengthened dollar borrowings to enjoy low interest rates?

The impact of this issue is not clear, as these loans often have terms of three to six months. Thus, many loans have not yet matured, but late in the third quarter or the fourth quarter, it could affect the dollar prices. As of now, it would not have much impact.

Are commercial banks facing thin dollar supplies?

Commercial banks' foreign currency supply has been strained over the past few days, as it is not abundant as it was months ago. To lure dollars, many commercial banks have broken a central bank's cap of interest rates on dollar deposits. The annual rates are capped at 2 percent.

The dollar liquidity is high at times and low at others. The evidence is that when we planned to lower commercial banks' dollar holding ratios over a month ago, many banks faced an abundant supply of the foreign currency, and had to invite firms to buy the greenback.

However, the dollar pressure has occurred over the past few days. We can still control dollar supply, but it is not abundant.

The central bank has just allowed gold traders to import five tons of the precious metal, which is expected to contribute to increasing the exchange rate. What should we do to deal with the issue?

I think the State Bank should strengthen propaganda so that local people understand that they should not buy gold when prices in the domestic market are higher than that in the world market by VND2 million ($94) per tael. Besides, it should take measures to reduce gold hoarding in the local market.

Are our foreign currency reserves enough to guarantee that we can keep our forex market stable?

In fact, the gap between gold supply and demand in Vietnam is not so big that buyers have to accept a price which is higher by VND2 million per tael than that in the world market. The increase in demand is due to the hoarding factor, so we need to import a moderate volume of gold. When speculators sell gold, the supply will be enough to meet the demand.

We don't have to import large volumes of gold, so the amount of dollars we need will not be high.

Does this mean that we have to deal with the gold issue before the forex issue?

Right. What we need to do now is to import a moderate volume of gold. After the import, gold trade will become unattractive to speculators, so they will sell the metal. Thus, we will not need a lot of dollars to import a large volume of gold.

Will the exchange rate between the dong and the dollar tend to rise from now to the end of this year?

If there are no major fluctuations in gold prices like now, the exchange rate between the dong and dollar would still rise. Vietnam has foreseen the dollar fluctuation, so active measures have been taken, including strengthening dollar purchases, asking state-owned businesses to sell dollars to commercial banks, strengthening monitoring of dollar borrowers, and reducing banks' dollar holding ratios.

So while dollar prices go down in the world market, they will still rise in Vietnam?

This is not the first time we have faced this situation. It happens frequently in our country, as Vietnam is always experiencing a trade deficit, making demand for dollars higher than supply always. And because of this demand, dollar prices will still rise in Vietnam although it goes down in the world. Besides, the Vietnamese dong is being devalued because of high inflation.

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