Nhan Dan Online – At present, most of the transactions in the free US$ market have far exceeded the exchange rate level of VND 18,000/US$1. The exchange rate announced by the Sate Bank of Vietnam on November 12 2009 was VND 17,022/US$1, but US$1 in the free market was at times exchanged for over VND 19,000.

Although the US$ has seen a sharp increase in price, in the inter-bank system, US$ transaction turnover has only reached US$ 300 – 400 million per day. Following are the reasons for the continual increase in exchange rate in the past three months.

Indirect impact of economic stimulus package

Until the end of October 2008, the amount of disbursement for the 4% interest rate support package had been over VND 412 trillion. Such a large amount of money borrowed by economic institutions from commercial banks for production and business raised the credit growth in the first ten months of 2009 to 33.29%, exceeding the forecast of 30% for the whole 2009, and it is not ruled out that a certain amount of money was used to renew loans at banks, making the rate of bad debts at these banks reduce to 2.46%.

Obviously, Such an abundant source of money has created pressure on devaluating Vietnamese dong (VND) compared to other currencies (since early this year, the price of VND has seen decreases of 2.1%, 11.7%, 35%, 20%, 18.5%, 10.2% compared to US$, EUR, AUD, CAD, GBP, CHF respectively).

Trade deficit

With the production cost structure of the Vietnamese enterprises being 80% of materials imported, the demand for import is naturally bigger. The latest figures showed that export turnover in the first ten months of 2009 reached over US$55 billion while import turnover was up to nearly US$9 billion (the trade deficit in 2009 is expected to be over US$12 billion). This in combination with the amount of VND held by enterprises and demand for buying US$ to pay for imported goods has caused the devaluation of VND in recent time.

Foreign exchange reserve

According to the Prime Minister’s report to the National Assembly, at present, foreign exchange reserve is sufficient to cover 12 weeks of imports.

Meanwhile, ODA disbursement until the beginning of October 2009 had been put at over US$1.7 billion. Overseas remittance flowing into Vietnam is predicted to be about US$6.8 billion in 2009 (in 2008, US$7.2 billion). Until October 2009, US7.2 billion foreign direct investment (FDI) had been disbursed, the foreign indirect investment (according to the Vietnam Association of Financial Investors) had been put at around US$5 billion. It is the difference between sources of supply and demand for foreign currencies in the Vietnamese economy that has pushed the exchange rate to ‘ceiling’ level compared to the levels announced daily by the State Bank of Vietnam.

Paradox and solution

While countries with their foreign exchange reserve in US$ tend to sharply change their assets from reserve of US$ to reserve of gold, causing a sharp reduction in the price of US$ in the world currency market, this development is opposite in Vietnam.

This has been proven when gold price has skyrocketed to over US$1,100 an ounce and is forecast to reach the level of US$2,000 an ounce, and at the same time, the prices of EUR, NDT, Yen, AUD and CAD have risen sharply in comparison with US$.

The solution to exchange rate management is to use the tools of exchange rate management in a flexible manner:

- Continuing to increase foreign exchange reserve, extend the time for foreign payments, reduce Vietnam’s investment in foreign countries and take advantage of disbursing ODA sources.

- Issuing international bonds (now the Government’s debt is 44% of GDP); skillfully combining interest rate tools with required reserve to rationally raise the foreign exchange reserve.

- Using derivative tools to buy US$ in the international currency market.

Of the above-said solutions, issuing international bonds is considered as the most advantage because the cost of borrowing US$ is low in this context. This will create favourable conditions for increasing the national capital source with cheap ‘prime cost’, thus helping the Government’s moneytary policy fulfill the set target.

By Tong Quang