Vietnam's Association of Financial Investors (VAFI) has just proposed a priority measure that overseas investors who are stock traders can buy foreign currencies. VAFI's Secretary General Nguyen Hoang Hai admitted that the scarcity of VND in the monetary market in general and for the demand of foreign stock investors in particular was a difficult problem that needed quick and feasible solutions.
VND/USD exchange rate unable to reflect reality
Mr Hai blamed the inability to reflect reality of VND/USD exchange rate for scarcity from the angle of foreign investment. In recent years, Vietnam has constantly maintained the policy of weak VND, i.e. VND and USD move in the same way. This policy has helped boosting exports. However, it has existed for a long time while VND has, in fact, appreciated. In other neighbouring countries, their currencies already appreciated 25per cent against the U.S dollar. Additionally, Vietnam's bond market has drawn special attention from international bond investment funds since the issue of Circular No. 72 by the Ministry of Finance in Quarter 4, 2006 (the first time method of calculating stock investment tax is introduced). Foreign investors assessed that interest rate of Vietnam's government bond was higher than the average level in the international market. In the future, VND is estimated to appreciate against USD, thus investors will benefit from exchange rate arbitrage (5per cent-10per cent) if they want to transfer bonds or convert to USD when their investments fall due.
VAFI estimated that foreign investors had bought an approximate value of USD5 billion of Vietnam government bond since the fourth quarter of 2006 from some unofficial sources of information (a few foreign deposit banks).
Furthermore, FDI registration rose by USD20 billion in 2007, but capital disbursement was a little bit higher than last year, thus this is not the main reason for scarcity of VND. Foreign indirect investment in stocks has totaled USD4 billion since the year 2007; much lower than the excessive investment inflows of USD12 billion in 2007. That means foreign direct investments in government bond are the real big number.
Facing those movements, VAFI assessed that the pour of foreign indirect investments into Vietnam while VND/USD exchange rate did not reflect the real rate was putting appreciation pressure on the VND and causing scarcity. Consequently, commercial banks hesitated to buy USD with the fear of loss. These fluctuations also put the State bank under the burden of buying USD while its ability was limited, thereby constrained the foreign indirect inflows in stock market, reduced the demand of stock market and affected stock investment environment.
USD/VND rate adjustment: Inflation fighting
“The question is: Vietnam inevitably attracts foreign investments but in which way to assure the sustainability of monetary and stock markets?” says Mr Hai. As proposed by the VAFI, the State bank should take action to adjust VND/USD rate to increase the value of VND by 5per cent in 2008. This measure is used to moderate foreign investments in short-term debt tools such as bank notes, treasury bills or short-term government bonds.
“This is a feasible anti-inflation solution. An increase of 5per cent in VND value means a decrease of the same amount in gas and oil price, bringing about price fall in other manufacturing inputs. Thanks to this move, banks can reduce foreign currency buying, and Vietnam can channel indirect investment flows to the stock market, helping improve this market's demand and prevent its descending trend", remarks Mr Hai.
On the other hand, the Ministry of Finance should reconsider the issuance of short-term government bonds. "Is it reasonable to issue short-term government bonds (under two years) meanwhile bond disbursement is always slow and it is difficult to disburse immediately the full amount of investments? Should the state budget borrow flexible amounts of money based on real demand from commercial banks when it needs money in the short run to avoid idle capital”, says Mr Hai. If issuance of short-term government bonds is necessary, only domestic financial institutions should be allowed to participate in auctions. This measure can make borrowing rates increase but not VND's appreciation, and still prevent state bank from buying foreign currencies.
Priority of buying foreign currencies aims at overseas stock investors
The stock market is going into free fall though price of many stocks has become dirt-cheap due to the crisis of psychology and belief in the individual investor world. In the eyes of various foreign investors, the market is fully attractive but they still face difficulties in buying VND. The State bank has not resumed USD purchase at foreign banks.
In the context of unimproved VND supply, VAFI advised that the State bank's purchase should focus on foreign stock investors. The State bank just needs to send commercial banks where foreign investors leave deposits a notice of buying VND for stock investment. Investors will only have to register through their deposit banks, and then their name list with amounts of currency purchase will be sent back to the State bank. Thus, demand for foreign currencies can be met easily.
VAFI reckoned demand for VND in order to buy stocks in 2008 would be: For listed securities: From USD10 million to USD15 million each day, USD200-300 million every month, and more than USD2 billion a year; for OCT shares and IPO: approximately USD2 billion. Total investment amounts USD4 billion per year regardless of selling state-owned stake in government's business groups. However, these activities are seen as seasonal. USD4 billion in 2008 is not much compared to the record level of USD12 billion in 2007. Indirect investment in stocks is forecasted to increase by 30per cent following the growth rate of stock market if we have proper monetary policies.
“By analysis, it is clear that there are no difficulties in satisfying the demand for VND from foreign investors. The State bank can conduct various purchases. Each purchase is able to meet the demand in a quarter", affirms Mr Hai.
Lan Anh
Vietnamese
