The State Bank of Viet Nam yesterday widened the dong's trading band to minimise the negative impact of China's currency devaluations. — VNS Photo Truong Vi

Ngoc Duy

HA NOI (Biz Hub) — Viet Nam's central bank yesterday widened the dong's trading band in a move to minimise the negative impact of China's currency devaluations.

The State Bank of Viet Nam (SBV) announced that the local currency could now trade as much as plus or minus 2 per cent of the fixed rate set by the central bank, instead of the previous 1 per cent.

The dong's fix, or the inter-bank exchange rate, remains unchanged at VND21,673 per US dollar. With the current trading band, the ceiling rate is VND22,106 per dollar and the floor rate is VND21,240 per dollar.

All commercial banks immediately raised their dollar selling rates yesterday, almost reaching the central bank's ceiling rate, up roughly VND200 over the previous day.

Vietcombank listed the buying and selling rates at VND21,990 and VND22,060 per dollar, respectively, while BIDV's rates were VND22,000 and VND22,060 per dollar, respectively.

The rates at Eximbank were VND21,990 and VND22,080 per dollar, respectively, while ACB listed its rates at VND22,000 and VND22,080 per dollar, respectively.

SBV's adjustment came as China devalued its yuan's reference rate by 1.9 per cent on Tuesday and again by 1.62 per cent yesterday after a run of poor economic data.

"The move aims to reduce the negative impacts on the Vietnamese economy and ensure the competitiveness of Vietnamese goods in the global market," the central bank of Viet Nam said in an online statement.

Vietcombank Deputy Director Pham Thanh Ha said the central bank's response was timely and expected by industry insiders. His bank was seeing good liquidity with normal transactions, he added.

The new trading band would enable adequately flexible exchange rate moves while maintaining necessary stability, he said.

Tran Hoang Ngan, a member of the National Assembly Economic Committee, said the adjustment helped support the country's exports and its trade balance with China.

Importers were worried by the increase in exchange rates, Nguyen Van Thuong, director of a food import company in HCM City, told news website ttvn.vn.

"It is definitely a disadvantage for us as it means import costs are rising," Thuong said.

A kilogramme of meat imported at a price of US$2, not including transportation charges, would be valued at VND43,600 in Viet Nam about a week ago. But now it would amount to VND44,200.

"The costs are rising, but we won't be able to raise our selling prices overnight, since any price increases must depend on the purchasing power in the market," he said. "It will be hard for businesses to avoid losses without more careful calculation."

Banking expert Nguyen Tri Hieu said increasing dollar prices would have a negative impact on inflation. They would push up the prices of imported goods and were likely to hike public debts, more than half of which were foreign and nominated in dollars.

However, the loosening of the dollar-dong trading band would help SBV save its foreign exchange reserve, which was seeing growing pressure with the central bank's previous insistence on maintaining the inter-bank exchange rate, he said.

Overspending

During a talk with Viet Nam News last Friday, Hieu warned that the central bank might face overspending in the reserve, as it was determined that it would not weaken the dong further this year.

Hieu said the central bank was likely to have to use "a great deal of foreign currency" to cap the total dong devaluation at 2 per cent in 2015, especially since it had already reached its maximum planned devaluations for the year.

In late July, SBV Governor Nguyen Van Binh announced that the central bank had foreign exchange reserves of around $40 billion, including the value of 10 tonnes of gold – enough to intervene in the market if necessary.

He said SBV was committed to maintaining the depreciation limit to protect national interests, after several industry insiders tried to convince the central bank that global developments were prompting further depreciation of the domestic currency.

Hieu said that based on import values reaching $150 billion last year, the current reserves could cover three months of imports – an adequate amount of security for now.

However, the reserves could be overspent throughout the rest of the year, as the country was witnessing significant declines in its foreign currency revenue.

Revenue from oil, which accounted for up to 10 per cent of the State budget, had dropped sharply as oil prices had fallen to around $45 per barrel – less than half of the $100 that the country expected at the beginning of 2015, Hieu said.

Notable decreases had been seen in exports of farm produce, aquatic products and seafood. Tourism had also slowed.

"Overspending of the foreign exchange reserve will negatively affect the domestic economy," he said. "With my knowledge about the local economy, it will be alright if the central bank uses up to between $4 and $5 billion to intervene in the market, but it would be dangerous to use more than that."

"The growth improvement in Viet Nam is broadening, but this growth will be accompanied by a deterioration of the current account in the medium term," said Eugenia Fabon Victorino, an economist from ANZ Bank in Singapore.

"We still believe that the dong rate as a policy tool should be allowed to reflect the reality of such a dynamic in macro-fundamentals to achieve a sustainable growth model," she said.

Exchange rate

Hieu cited The Economist surveys as showing that the dong has overly appreciated and that – following the theory of purchasing power parity – the exchange rate in Viet Nam should double its current trading levels.

"Imagine how you and I would be, say, if the prices of rice doubled right now," Hieu said. "Maybe we would fall into poverty. I don't think that the dong exchange rate should double to reach its true value, but it should probably rise 25 per cent in the years to come."

The country's disbursed foreign direct investment reached $7.4 billion during the first seven months of the year – it's highest ever, said Victorino. This should partially offset the upside pressure on the dollar-dong rate.

"We are looking closely at the possible impact of market movements on official foreign exchange reserves and the import cover," she said. "In view of the surge in imports in 2015, we will remain watchful of the dollar-dong rate's direction in the market." — VNS