Pressure on Exchange Rate Continues

2:52:43 PM | 7/8/2011

Vietnamese currency - VND - continues to lose its value against hard currencies when the country’s trade deficit is forecast to widen again. Complex developments of global economies and finance sectors, volatile exchange rates of US dollar against euro, Chinese reminbi, Japanese yen and other currencies in the world as well as fluctuations of USD/VND exchange rate are major concerns of Vietnamese banks and businesses.
Trade deficit remains a concern
Trade deficit ballooned in the first three months of 2011, totalling more than US$3 billion. A series of measures to narrow the trade gap were applied but the gap doubled in the next two months. The Ministry of Planning and Investment reported that trade deficit equalled 16.7 percent, 18 percent, 16.3 percent, 19.2 percent and 22.7 percent of exports in January, February, March, April and May, respectively. The gap eased in June on the slowdown in CPI growth. Hence, the trade deficit was just US$6.65 billion in the first six months, equal to 15.7 percent of exports. Although the trade deficit unexpectedly cooled down, policymakers did not feel very happy because of unsustainable supporting factor. The drop in trade deficit was resulted from earnings from gold export. Gold and gemstone export valued at US$630 million in June, bringing the six-month value to over US$1 billion. If gold export was excluded, Vietnam’s trade gap would widen to US$7.65 billion, equal to 18 percent of its exports.
 
Hence, the slowdown in trade deficit was not sustained in this way. In 2009, Vietnam enjoyed a trade surplus on a strong growth in gold export but lofty deficit returned just three months after that.
 
Alarmingly, trade deficit is facing a “dual threat” when Vietnam has to use more value for less quantity. In reality, Vietnam started importing coal for thermal power plants and it will pay more money to import a less quantity of coal it has sold. In the next few years, Vietnam will have to import crude oil for refineries and iron ores for smelters.
 
This reality can be interpreted from crude oil export and petroleum import. The Ministry of Industry and Trade said petroleum import reached 5.14 million tonnes worth US$4.5 billion in the first five months of 2011, up only 15.6 percent in volume but up 41 percent in value. This fact also happened to other commodities Vietnam relied on imports like rubber, fibre and metal.
 
Trade deficit equalled 7.9 percent of Vietnam’s total exports in 2001 but it soared to 17.47 percent in 2010. According to the Institute for Trade Research, the trade gap of Vietnam averaged at some US$5 billion a year in the 2000 - 2006 period but it surged at alarming rate after Vietnam entered the World Trade Organisation (WTO) in 2007. Remarkably, trade deficit accounted for nearly 30 percent of exports in 2007 and 2008. High deficit placed heavy pressures on the balance of payments, and was a major cause of exchange rate fluctuations.
 
Pressures on exchange rate
The VND/USD exchange rate seems to be calm down as the rate on free market is even lower than on the so-called official rate quoted by commercial banks. After the recent dollar fever, many experts expressed their concerns over disadvantages caused by a loss in dollar value. Dr Le Hoang Nga, a senior expert at the State Securities Commission of Vietnam (SSC), said: “Changes in exchange rate will directly impact operations of banks and businesses. Particularly, macro uncertainties pertaining to import and export, international payment balance, and budget deficit make exchange rate stability more complex.”
 
After the State Bank of Vietnam (SBV) imposed a ban on trading US dollars on the free market, the forex market cooled down. However, the appreciation of US dollars worsened concerns of many experts. Prof Cao Cu Boi, an economic expert, said that [the State Bank of Vietnam (SBV)] should not let the greenback price be as low as now as trade deficit will cause more adverse impacts on the economy when the US dollars depreciate significantly. On the other hand, the Vietnamese dong not only appreciates against the US dollar but also against the Chinese yuan while the trade with China contributes up to nearly 90 percent of Vietnam’s trade deficit. Financial experts worry that trade deficit will weigh on the balance of payments and exchange rates towards the end of this year.
 
Risks from foreign currency loans
For the time being, borrowing foreign currencies seems to be better than the Vietnamese dong because the latter’s interest rates are very high, usually staying at 22 percent to 24 percent per annum. Meanwhile, interest rates on USD deposits were capped by the State Bank of Vietnam at 0.5 percent per annum for institutions and 2 percent for individuals. From July 1, State-owned corporations were forced to sell foreign currencies to banks and the supply of US dollars is expected to be profuse. US dollar lending rates are hovering at 8 percent per annum, much lower than the rates on VND loans.
 
Meanwhile, exchange rates tend to stabilise and inhibit businesses from borrowing this currency [the dollar]. In May 2011, credits outstanding for the economy were estimated to increase 0.01 percent over the previous month, of which Vietnamese dong credits fell 0.64 percent but foreign currency credits rose 2.19 percent. After five months of this year, foreign currency credits climbed up to 19.8 percent.
 
However, trade deficit remains an existing risk from now to the end of the year. The consumer price index has slowed down but it will stay high this year. Electricity prices are likely to jump highs, basing on calculations of power producers, while prices of petroleum products depend on global rates. If prices of these inputs climb, they will push up prices of other commodities in the country. Additionally, if credits in foreign currencies surge, they will put pressures on exchange rate when they get mature.
 
Exchange volatility is not a problem for exporters with incomes of foreign currencies but forex risks remain a major concern for other businesses. Meanwhile, many businesses are unfamiliar with derivative instruments like future foreign currency purchase contracts. If they use insurance instrument, they must pay high for this. For example, the spot exchange rate of the US dollar against the Vietnamese dong is now at 20,580 and the interest rate differential between the dong and the dollar is 17 percent (20 percent minus 3 percent) on the interbank market, the price of the dollar for a three-month futures contract will be 21,474 Vietnamese dong per dollar, meaning that banks will sell foreign currencies to customers at VND21,474 for a dollar for the next three months.
 
Le Minh