There are several ways for foreign currencies to flock to Vietnam.

First, through portfolio investment. It is estimated that the total capital foreign investment funds and foreign investors have brought into Vietnam to make securities transactions has reached $4.5bil so far this year. Some other sources say investment capital has reached $5bil.

Second, overseas remittance. The overseas remittance to HCM City alone has exceeded the $3bil threshold, not including remittance through other unofficial channels. In 2005, the overseas remittance to Vietnam was reportedly at $4bil. The figure rapidly rose to $5.2bil in 2006, and it is expected to reach over $6bil this year.

Third, foreign direct investment (FDI) and official development assistance (ODA). As for FDI, the registered FDI capital was $10.2bil in 2006 as a whole, while it reached $9.6bil in the first nine months of 2007 alone.

And fourth, foreign currencies have been brought to Vietnam by tourists, the number of whom has been increasing rapidly in the last few years.

The excess of foreign currencies in circulation has forced the State Bank of Vietnam to spend VND112,000bil to buy $7bil. However, the sum of dollars the central bank has bought seems to be too small compared to the sum of foreign currencies available on the market.

Commercial banks now have to buy big volumes of foreign currencies from their traditional clients – export companies – while they cannot sell foreign currencies while the demand for foreign currencies for import deals is limited. As a result, commercial banks’ foreign currencies are now in excess, which makes them incur losses with the VND revaluating.

Commercial banks have criticised the central bank for not taking action to interfere in the market by buying excess foreign currencies from banks.

The VND/US$ exchange rate is now at VND16,082-16,085/US$1, which represents just a very slight increase of 0.19% compared to the rate of one year ago.

Several days ago, Deputy Prime Minister Nguyen Sinh Hung instructed the State Bank of Vietnam to continue buying foreign currencies to increase the national foreign currency reserve and ease the foreign currency excess. However, when and how much the bank will buy are not yet known.

Meanwhile, experts have urged the central bank to reconsider its policy on keeping the VND weak to encourage exports.

Since the beginning of the year, the dollar has been devaluating considerably against other hard foreign currencies on the world’s market. The dollar has also been devaluating against 8 currencies in the region. Therefore, the fact that the dollar is revaluating against the VND proves to come contrary to the tendency in the world.

The VND/US$ exchange rate announced by the central bank has seen the increases of 0.35-0.38% so far this year, while the exchange rate in the black market for now is not seeing any increase compared to the beginning of 2007.

Analysts say that the devaluation of the VND has not helped much in encouraging exports, while the weak VND has had bad impacts on imports as Vietnam saw a big trade deficit in the first nine months of the year.

They say that if exporters heavily rely on the weak local currency to boost exports, they will not pay appropriate attention to improving their products’ quality, the main factor that makes their products more competitive in the world’s market.

The exchange rate policy should be driven on in a way that prevents the sharp price decrease of the dollar and the local currency from further devaluating.

The analysts have also suggested that the central bank spend more VND to buy dollars and use the dollars more effectively. China, for example, has also increased its national foreign currency reserve, and it has made investment in US treasury bonds, which can bring high interest.

The government should not continue issuing bonds in foreign currencies in the international market with high interest rates as it did in 2005. It should use the foreign currencies it has bought to pay debts and invest, which will foster economic growth and create more jobs.

Source: VietnamNet.