The Exchange Rate Band Should Be Widened

In the context of fluctuating world markets, many experts said that the State Bank of Vietnam (SBV) should consider increasing the flexibility for exchange rate by widening the rate band, instead of from +/- 3 percent.

After two consecutive increasing sessions with a total increase of 21 dong to 23,121 VND/USD, the central exchange rate was adjusted down by SBV to six dong to 23,115 VND/USD in August 15 session. In general, from the beginning of the week until now, the central rate has increased by 13 dong, up 42 dong since the beginning of August. As compared to the end of 2018, the central exchange rate has increased by 290 dong, equivalent to an increase of 1.27 percent.

With a range of +/- 3 percent, the exchange rate on August 15 was 22,422 VND/USD and the ceiling rate was 23,808 VND/USD. Currently, SBV also reduced the selling price of US dollar to 23,758 dong per US dollar, lower than the ceiling rate of 50 dong, but still kept the buying price at 23,200 dong per US dollar.

Although the central rate has been adjusted continuously by management agencies, the real exchange rate of banks has not changed much this week after falling slightly last week. Accordingly, the banks still list the US dollar purchase price popularly in the range of 23,14023,150 VND/USD, while the selling price is about 23,26023,270 VND/USD.

This movement was evaluated by Bao Viet Securities Company (BVSC) as relatively unexpected in the context of China yuan’s dramatic decrease in the past week. Indeed, not only last week, the yuan continued to decline sharply this week. Accordingly, although the reference rate of the yuan against the US dollar increased slightly by the People’s Bank of China (PBoC) yesterday to 7.0268 CNY/USD, but according to experts’ estimates, the central exchange rate should be raised to 7.0236 CNY/USD. This is the sixth consecutive session that PBoC fixes the reference rate below seven CNY/USD. generally, from the beginning of August until now, the reference rate of yuan against the US dollar has decreased by two percent.

Meanwhile, although the US dollar has decreased slightly compared to the two-year peak set in late July, it still stands at a very high level. The dollar index is now revolving around 98 points, only 0.5 points lower than the two-year peak.

According to HSBC experts, the US dollar pegged at a high level, while the yuan plummeted, affecting the domestic exchange rate in the increasing direction. However, the rate of banks is only equivalent to the end of 2018. It means that the dong is one of the lowest volatile currencies compared to US dollar since the beginning of the year.

The reason that the domestic exchange rate only fluctuated slightly despite the wind from the outside, BVSC said, abundant foreign currency supply thanks to trade surplus and overall balance of payment surplus are supporting factors for the dong. The latest statistics of the general Department of Customs showed that the economy continued to trade surplus of $43 million in July, raising the trade surplus in the first seven months to $1.7 billion.

Stable exchange rates have contributed to macroeconomic stability, thereby strengthening the confidence of foreign investors. This is reflected in the disbursement of foreign direct investment capital in the first seven months of this year, reaching $10.6 billion, up 7.1 percent compared to the same period in 2018. Foreign capital contribution channels also reached $8.52 billion, up 77.8 percent over the same period in 2018.

However, in the context of falling yuan, the stable domestic exchange rate also means that the dong is appreciating against the yuan. For example, according to SBV, if 3,350.95 dong was exchanged for one yuan at the beginning of August, only 3,295.75 dong is now exchanged so far. It means that the dong has increased by 1.65 percent against the yuan in the first 15 days of August.

Many experts also forecast that from now until the end of 2019, the yuan may decrease about five to six percent to 7.35 CNY/USD. That will certainly put great pressure on the domestic exchange rate. However, experts said that we should not rush to devalue the dong, because that will bring more damage to the economy.

“The devaluation of dong has not been able to support much for domestic exports as well as to improve the trade deficit with China, because the trade deficit from China is structural when many industries are dependent on the source of raw materials imported from this neighbouring country,” an expert said and warned that the devaluation of dong might cause macroeconomic instability, pushing inflation up, thereby eroding trust of foreign investors. That is not to mention the high exchange rate also increased the burden of foreign debt of the government and businesses. There is also another reason that cannot be ignored is that the sharp devaluation of the domestic currency may cause Vietnam to be accused of currency manipulation.

That is also the opinion of many organisations. KB Securities said that SBV would choose the right time to sell foreign currencies, supporting the stabilisation of the exchange rate below the target of three percent at the beginning of the year and preventing Vietnam from the American regulation violation on net purchase of less than two percent.

However, many opinions also recommended that SBV should closely monitor market movements to actively regulate the harmonious exchange rate and consider widening the exchange rate band.

 

Category: Finance, Vietnam

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