April 28, 2011Vietnam ~ The 70-day Journey Of Foreign Exchange Policy
Since its revision on February 11, the foreign exchange policy has been on the right track. As a result, less than 70 days since the effective date of the new policy, the wild rate on the unofficial market has been tamed to approach the list price offered by commercial banks. Undoubtedly, the State Bank is putting the foreign exchange market under its control. What follows is how to maintain that grip.
According to reports by credit institutions, as of April 14—one day after the annual 3%-interest cap was applicable to individual depositors—they began to buy cash in U.S. dollars at list price. Each day, a big bank might manage to buy cash worth millions of U.S. dollars while smaller ones bought hundreds of thousands of U.S. dollars. Also, each transaction might amount to thousands of U.S. dollars, and a considerable part was from U.S. dollar-denominated savings on expiry. After selling their U.S. dollars for dong, many account owners have re-deposited money at the banks.
The strongest boost to the initial shift from the greenback to the dong comes mainly from the wide gap of U.S. dollar/dong interest rates—being 11% a year. The effective rate may be even higher because some depositors have negotiated for a higher rate than the official 14%-level set by the central bank.
The second motive is that the official exchange rate will be stable at least in the next three or four months after being revised down by 9.3% in a deep devaluation of the dong in February. At the same time, the official margin of the U.S. dollar-dong exchange rate has been narrowed to 1%.
The third one which should be emphasized is the effort to put foreign exchange agents under tight control. Coupled with this measure is the tightening money supply, forcing foreign currency holders to resort to using dong when dong demand is not fully or only partly met. The above measures have been implemented in a concerted way at the right time, and have supplemented one another in a flexible manner.
In line with Notice No. 84 dated April 13, 2001 by the Government Office, the Sate Bank is tasked with compiling a revision of foreign exchange management to be forwarded to the Government for approval. Changes will be made mainly to regulations of business’ foreign loans and debt payments not underwritten by the Government, foreign currency transactions of State-owned conglomerates, and credit institutions’ foreign exchange position. The revision also stipulates that Vietnamese are allowed to carry with them cash worth US$5,000 at most on their trips to foreign countries.
Notably, the State Bank will coordinate with related agencies to set up a compiling board for the revision of the Ordinance of Foreign Exchange with a view to effectively tackling “dollarization” in Vietnam. The ongoing revision partly mirrors the Government’s determination in making a radical change to foreign currency management. However, details of this process will depend largely upon the foreign exchange market itself and, on a broader scale, the stability and development of macroeconomics.
More than anyone else has, money policymakers have known well that Vietnam’s foreign currency inflow is bigger than the outflow. However, for years, Vietnam has suffered from a deficit of balance of payments and errors in the national monetary balance sheet. The recent steps taken in the foreign exchange policy are to correct these errors. For instance, remittances from overseas should go to banks through commercial channels to offset trade deficit. Savings in foreign currencies can be turned into national reserves once they are sold to commercial banks, and then to the State Bank. Such moves will gradually enable the domestic currency to play a great role on its path of becoming the only tool for payments in the country.
Building the domestic currency into the sole tool for payments in Vietnam is the ultimate goal of the monetary policy. To reach that achievement, however, it needs more time. More importantly, it must fit into Vietnam’s economic development at a specific time.
So far, knowing how much foreign currencies Vietnamese are holding has been pure guesswork. Currently, the total outstanding loans of the banking system, as per circulars 13 and 19, is equal to 80% of capital mobilization. If VND110 trillion worth of credit growth in this year’s Q1 is added to banks’ total outstanding loans of VND2,300 trillion by the end of 2010, the total outstanding loans of the first three months will be VND2,410 trillion, and the mobilized capital will be about VND3,000 trillion.
Normally, foreign currency-denominated outstanding loans is equal to 25% of the total outstanding loans, or VND600 trillion (US$28.7 billion). Last year, the total foreign currency-denominated outstanding loans were US$2 billion higher than the total mobilization. Deducting this figure and presuming 50% of the mobilization is from individuals, it is estimated that Vietnamese are depositing more than US$13 billion at banks.
The above amount is the internal force of the economy. The problem is how to bring that force into full play as is in the case of capital-starved Vietnam. But the hope that the US$13-billion savings will be turned immediately into the domestic currency may be way too optimistic. Such a process may take not months but years. What’s more, the domestic currency must have enough time to brace itself for such a bigger role.
The dong is definitely building up its strength. However, that strength must be maintained and consolidated to last long
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