In the first five months of the year, the State Bank of Vietnam (SBV) bought US$7 billion when the dollar supply was profuse. According to Nguyen Dong Tien, Deputy Governor of SBV, the purchasing aimed to balance supply and demand and to increase the national foreign currency reserve.

The opportunity to increase the foreign currency reserve, once again, has come, with the dollar supply proving to be in excess thanks to the high inflow of foreign direct and indirect investment, and high overseas remittance.

The Deputy Prime Minister’s instruction came after mass media reported that the central bank refused to buy foreign currencies from commercial banks, insisting that the dollar supply was not in excess. Analysts guess that the central bank is not buying dollars at this moment for fear of increasing the volume of VND in circulation, thus increasing inflation.

Deputy Prime Minister Hung has also asked SBV to take necessary measures to withdraw money from circulation, which may rise as the result of the move to buy foreign currencies. In the first five months of the year, the central bank spent a big sum of VND to buy foreign currencies, and then it had to issue bonds to withdraw VND from circulation. However, 13% of the spent volume of VND reportedly remains in circulation.

SBV has also been requested to make suitable intervention into the market so as to keep the VND/US$ exchange rate at a suitable level, and avoid an overly sharp devaluation or revaluation of the local currency.

Worries have been raised about whether or not the inflation rate would be pushed high if the central bank spent VND to buy foreign currencies.

Analysts say that this would not happen as VND would be injected gradually from now till the year’s end, and SBV would not spend a big volume of money at one moment. At the same time, the central bank would consider issuing bonds to withdraw money from circulation.

The foreign currency reserve is estimated to have over $20bil, and the figure may be higher towards the end of the year. The VND/US$ exchange rate shows signs of recovering after falling down in the last few days.

The VND/US$ exchange rate stayed at VND16,079/US$ late last week, and moved up slightly earlier this week to VND16,081/US$1. The greenback has decreased by 1% in value in the official market, and 0.8% in the black market.

Officials from SBV have attributed the revaluation of the VND to the strong recovery of the stock market since September 15. Since then, the VN Index has increased by 170 points, attracting a big volume of capital to the market, including money disbursed by foreign investment funds. A big volume of foreign currencies has been converted into VND for investors to make transactions.

Investors are now whispering in each others’ ears about the possibility that $3bil worth of foreign capital will be poured in from now to the end of the year. Other sources say that the volume may be US$4.2 billion.

The foreign direct investment (FDI) capital was also very big in the first nine months of the year, reaching US$3.3 billion. Meanwhile, overseas remittance keeps increasing, expected to reach US$5 billion this year.

Vietnamese consumers have been benefiting from the weak dollar, especially when purchasing imported products. However, the weak dollar will not support Vietnam’s exports in the world’s markets.

Source: VNEconomy.