Forex fluctuations forecast to be temporary

Monday, Jun 24, 2013 10:47

In the afternoon of June 16, the forex rate at some gold shops in HCM City's District 1 was between VND21,200 and 21,300 per dollar, up by VND50 or 100 compared to three days earlier.—Photo dantri

by Compiled

(Biz Hub) — Since the start of June, the Vietnamese dong has been falling against the US dollar after a long time of stability.

In the afternoon of June 16, the forex rate at some gold shops in HCM City's District 1 was between VND21,200 and 21,300 per dollar, up by VND50 or 100 compared to three days earlier.

At commercial banks, the rate was VND21,036 per dollar.

The central bank itself made some adjustments to its forex rate. In particular, on June 16, the bank increased its selling price from VND20,950 to VND21,036 per dollar, and its buying price to VND20,850.

The remarkable thing in the latest fluctuation is that the buying and selling prices of the dollar are very close and sometimes they are the same. This means that the increase in market demand for the greenback is real.

There are many reasons for the current increase in the forex rate, one of which is the increasing trade deficit.

In May, the country's trade deficit jumped sharply to US$1.9 billion, up by VND0.9 billion over the previous month. The increase has put significant pressure on the forex rate.

Another reason is the spurt in import of gold to meet the demand of commercial banks to repay gold depositors before June 30, as required by the central bank.

Local commercial banks have so far bought more than 13.7 tonnes out of 15.22 tonnes of gold bullion offered by the SBV via 13 bidding sessions. They bought some 100 tonnes of bullion last year for the same purpose.

According to the central bank, the amount of gold needed to be bought until June 30, 2013 is around 20 tonnes.

The purchase is aimed at making up for the volume of gold that local banks have received from depositors in the past years, but had converted to Vietnamese dong for lending.

The central bank in October (2012) ordered local lenders to stop taking gold deposits from customers starting June 30.

With the huge demand, a considerable amount of dollars is believed to be used for importing the gold.

The current pricing gap between local and international gold bullion has also contributed to the increase in the forex rate.

Because the domestic gold price now is much higher than the global rate, many people are seeking ways to illegally import gold and profit from the difference.

The central bank's continuous cuts in the interest rate for deposits and loans in recent months have also affected the forex rate.

In the past, the interest rate for dong deposits was much higher than that of the dollar deposits (14 and 2 per cent per year, respectively), so many people sold the latter to enjoy the difference.

Now, the gap between the interest rates of dong and the dollar has narrowed, so people are looking to buy dollars for greater security.

For enterprises, the interest rate of dong loans has become more attractive, so those that had taken dollar loans decided to buy the greenback to pay them back, and then took dong loans to reduce forex rate related risks.

Despite all these reasons, the fall in the dong is not likely to increase by much or last much longer since the entire banking system's foreign currency liquidity is still good and foreign currency reserves are still plentiful.

In addition, when the banks complete repayment of gold deposits at the end of this June, demand for the greenback will fall.

In other words, the fluctuation of the forex rate is temporary and would soon become stable again. However, it also suggests that the central bank should consider adjusting the forex rate by 2 or 3 per cent to support the country's exports.

Bad debt situation improves

In the face of pressure to settle non-performing loans (NPLs), the State Bank of Viet Nam in April last year issued Decision 780/QD-NHNN regarding classification of debts which have been restructured or extended.

The decision allows credit institutions to persist with the restructured or extended loans if the enterprises are functioning well and have a good debt repayment capacity.

Thanks to the ‘Decision 780' lifeboat, many enterprises' debt terms have been restructured and these rescheduled loans are kept in their pre-rescheduled classification groups.

By April this year, debts worth about VND284.4 trillion ($135.2 million) had been restructured and maintained in the existing groups, according to a central bank source.

Decision 780 also requires credit institutions to actively settle their bad debts by using their risk provisions. It also contains provisions to punish those who do not set up risk provisions as regulated.

So credit institutions have to increase their risk provisions by reducing operation costs, profits and dividends.

As a result, in 2012 and in the first four months of this year, the credit institutions had settled non-performance loans (NPLs) worth VND76.7 trillion via the risk provisions.

The above policies have had certain positive impacts on both the banking sectors and enterprises.

In particular, by April this year, the banking sector's total bad debts had come down to VND137.1 trillion, accounting for just 4.67 per cent of the total outstanding loans. These figures are much lower than VND362.8 trillion and 11.5 per cent that were predicted if Decision 780 had not been issued.

This also means that the Decision 780 has helped credit institutions not use VND14.4 trillion from their annual profit to deal with bad debts.

Thousands of enterprises have also been able to gain access to new bank loans for their production and trading activities, thus creating conditions to push up banks' lending, and meet the credit growth target.

However, Decision 780 has not been without side-effects that can assume serious proportions later.

According to many insiders, Decision 780, to some extent, is a technical measure to help the banks to‘hide' their bad debts.

This means that if the bad debts are not exposed, they cannot be resolved as well.

Auto market revives

In a welcome break from previous years, the domestic auto industry's turnover has increased steadily in the first six months of the year, generating hopes a recovery is at hand.

According to the Viet Nam Auto Manufacturers' Association (VAMA), the total sales in the first half of the year reached 9,731 units including 2,784 cars and 5,947 trucks, a year-on-year increase of 42 per cent. Of these, 7,478 were domestically assembled vehicles.

This is of great significance since the domestic auto market has been really sluggish for a long time due to the prolonged economic recession at home and abroad.

The revival is mainly attributed to recent policies issued by the Government recently and auto traders' efforts to expand their distribution networks, both of which have stimulated demand.

In January, Prime Minister Nguyen Tan Dung signed Decision 02/NQ-CP, approving the Ministry of Finance's proposal to reduce registration fees.

The ministry had proposed that fees for first-time registration of cars with less than 10 seats is fixed at 10 per cent. The proposal also said localities should be allowed to raise the fees by a maximum of 50 per cent, depending on their specific situations.

The highest fee for first time registrations would be 15 per cent in total, lower than the old ceiling of 20 per cent for new cars in Ha Noi, and 15 per cent in HCM City and other localities.

The Finance Ministry also proposed cutting the fees for second registrations to 2 per cent, compared to the existing rate of between 10 per cent and 12 per cent.

2012 was a challenging year for Viet Nam's automobile industry. The market dropped by more than one-third, with just 93,000 units sold.

Most of last year's decline was attributed to increases in existing fees and taxes, as well as proposed new levies.

In response to the Government's policy change, many auto firms intensified investments in expanding their sales networks by opening new showrooms and appointing more agents.

In addition, both domestic joint ventures and official importers in the market became more active in introducing new designs and models to promote consumption.

The recovery of the auto market is expected to gather pace in the coming time with about 108,000 vehicles to be sold in the last half of the year when more localities nationwide apply the registration fees of 10 per cent. —VNS

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