BIDV and JPMorgan held an extensive meeting with Prime Minister Dung to discuss the current financial and economic situation in Vietnam. In the meeting, the PM made the following points:
Vietnam has no plans to devalue the Vietnamese Dong (VND). Looking at the balance of payments and the country’s overall economic situation, he sees no reason for a devaluation. They have studied the impact of a devaluation at this time and concluded it would not be helpful. Generally, normal supply and demand forces should determine the value of the VND, and with this in mind it is useful to note that, even at this time of stress in markets, the overall Balance of Payments showed a small US$1 billion surplus in the first five months of 2008. Currently the exchange rate fluctuation band announced by SBV is about +/- 1 per cent, lower than the estimated fluctuation band of +/-2 per cent for the year 2008. With the current reserves surplus, the PM believes that the +/- 2 per cent fluctuation band should be flexibly adjusted with reasonable steps, and at this moment, even stronger and clearer messages to the market about Vietnam’s resolve to maintain VND stability needs to be sent.
He is very aware that the black market rate is currently not close to the official band rate. However, he believes that it is not “true” supply and demand (for example, for trade or investment) that is determining the black market rate now, but rather rumors, speculation and part of commercial bank operation. He also knows that offshore VND markets are pricing in a devaluation of 20-40 per cent. He believes that this is not valid assumption.
So far, the State Bank of Vietnam (SBV) has not taken direct steps in the black market in terms of enforcement or intervention. He is meeting with the enforcement agencies to instruct and check the registered black market players (money changers, etc.) who are by law not to engage in speculation to stop this activity.
SBV intervention so far has not been large and has only been through certain market players. Going forward, intervention will increase in size and broaden in terms of counterparties.
The SBV has already been discussing both a crack down on black market speculators and a ramping up and broadening of its intervention activity. In his opinion, both would be justified.
As far as potential foreigner portfolio outflows, those are manageable, relative to the size of SBV’s FX reserves.
The USD level of FX reserves will be announced publicly. So far, the SBV has only reported the level to international financial institutions like the World Bank and IMF, and usually relative to monthly imports. To boost confidence, he will ask the SBV if it is possible to report publicly the dollar level of FX reserves.
He is very aware that Vietnam has the ability to tap the swap lines set up through the Chiang Mai Initiative. Drawing on the swap lines has been studied and they are keeping it in view.
In general, he is confident that the balance of payments will return to a significant surplus in the medium term. Indeed, the problem for the past five years had been that the surplus was getting too large and was helping to fuel onshore liquidity. With this medium-term view in mind, the SBV can intervene more agressively now, if that is what it takes to restore market confidence in the government's ability to maintain a stable VND.
As for maintaining local confidence in the VND, there are two keys. First, depositors must be assured of the overall stability of the banking sector. Second, VND deposit rates must be attractive. He will act to make sure both occur.
The imposition of capital controls is not being considered. He believes that it will be a mistake and goes against Vietnam’s commitment to moving to freer markets.
Growth will have to suffer this year. The new target of 7 per cent reflect this, based on the directive to slow capital expenditure by the government and state enterprises.
Inflation is too high and he is committed to bringing it down. But that cannot happen immediately. Over time, inflation will decline back to single digits by 2010, possibly earlier. When international prices for commodities are high, there is very little the government can do. Vietnam’s rice producers are having a banner year, with production well above last year’s harvest. However, he cannot tell farmers to sell at a lower price if they can get a much higher price by exporting their rice.
Vietnam will not enter into a program with the IMF. When he was the SBV Governor 10 years ago, he was the one who said then that Vietnam does not need the IMF yet. In his opinion, the same is still true today.
Vietnam has many reform issues it must address in order to continue to grow robustly and improve the lives of its people. These include reform of the legal system, the entire socio-economic infrastructure, income disparities, corruption, and the like. The PM remains fully committed to continuing to address these issues over the medium term. In the immediate term, confidence in the VND must be restored. (BIDV Original Source)
Vietnamese
