Vietnam has three contradictions in the local foreign currency market that need to be solved, the local Vietnam Economic Times reported.
First, Vietnam is a trade-deficit economy, but there is a paradox that supply of foreign currency has been higher than demand since the beginning of 2007.
The redundancy of foreign currency pulled USD/VND exchange rate down in all three markets: inter-bank, between commercial banks and businesses and free markets.
The USD/VND exchange rate fell more than 3 per cent from the beginning of March.
Vietnam’s current account balance surplus reached US$1 billion in the first quarter of 2008. The country had total surplus of US$6.6 billion in 2007, but if minus foreign currency used for overseas study, tourism and overseas healthcare treatment, it was between US$3 billion and US$4 billon last year.
In addition, people shift to depositing VND to banks in stead of UDS, which was creating strong supply of foreign currency.
Second, while Fed and Sibor reduced lending interest rates for USD, local banks raise the rate fast.
Sibor interest rates for one-year term are between 3.4 per cent and 3.6 per cent a year, but state-owned bank are offering the rates at between 6.45 per cent/year and 8.5 per cent/year, and joint stock banks at 6.8 per cent/year and 9 per cent/year.
Vietnamese exporters, therefore, will suffer higher costs, and less competitive than other regional countries.
There are some reasons for the higher lending interest rates. First, central bank in February required banks to increase compulsory reserves from 10 per cent to 11 per cent. Second, banks lack of USD because customers sell USD for Vietnam dong to deposit in banks. Third, businesses prefer borrowing foreign currency to Vietnam dong.
Third, while supply of foreign currency in monetary market increases sharply, the UDS/VND exchange rate falls, but commercial backs face shortage of USD and raise UDS interest rates.
Banks use foreign currency deposited by customers for lending, but not use foreign currency bought from the market.
The State Bank of Vietnam limits purchases of USD, making the USD/VND exchange rate fall rapidly, and reducing costs for imports.
If central bank buys a large amount of money, it must supply a big volume of VND into circulation, putting pressure on inflation. But if it does not buy UDS, the exchange rate will go down fast and cause dollarization, the newspaper said. (Vietnam Economic Times)
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