Buying US$ to support growth

Why does the central bank need to buy dollars? It is because, according to Dr Vu Dinh Anh, Deputy Head of the Ministry of Finance’s Institute for Market and Price Research, there are too many dollars on the market coming from foreign indirect investment and overseas remittance. Besides, under the current regulations, investors cannot make investment transactions in dollars, and the central bank must buy dollars and give VND to investors.

Mr Anh has also mentioned another important reason that Vietnam’s trade deficit has reached $9bil so far, and Vietnam needs to have an equivalent sum of dollars to offset the deficit.

Sharing the same viewpoint with Mr Anh, Le Xuan Nghia, Director of the Banking Development Strategy Department under the State bank of Vietnam added that Vietnam needs to buy dollars in to curb the devaluation of the dollar, which will make Vietnam’s commodities less competitive on the world’s market. Vietnam has been pursuing the policy on the weaker VND in order to support export.

By September 2007, the export turnover had reached $39bil, or $4.3bil a month, which means that the total export turnover would be $51.6bil for this year. The GDP of 2006 was $65bil, and supposed that the GDP of 2007 is $72bil (GDP growth rate is estimated at 10%), we can see that the export turnover makes up to 71.6% of GDP. As such, with the national economy, where exports make up 71.6% of GDP, it is understandable why the central bank needs to follow a policy on weak VND to support exports.

The more IPOs, the higher the inflation

Experts said that among the $9bil the central bank purchased in the first half of the year, $6bil came from foreign indirect investment. Investment funds and foreign investors have brought money to Vietnam to disburse for the upcoming IPOs of big corporations and banks like Vietcombank, Incombank or PetroVietnam. It is expected that some $3-4bil more will inflow into Vietnam in the last months of 2007.

According to Mr Anh, the majority of VND the central bank spent to buy dollars in now are not in circulation, but on the hands of foreign investors. The investors cannot spend the VND they have, because there seems to be no more room for them in local companies (foreign ownership ratio is 30% at maximum). As a result, they keep the VND they have in bank accounts, and waiting to disburse for big IPOs.

Supposed that foreign investors put the volume of VND96tril ($6bil) at bank deposits, what will happen then? There are several scenarios.

First, the volume of money has still not had bad effects on CPI because the money has not been put into circulation yet. However, if keeping the money at banks for a long time, investors would suffer losses, because they bring money to Vietnam to make investment deals, not to make bank deposits.

In this case, the investment environment will bear negative impacts, and the playing fields for securities investors will be narrowed. Meanwhile, commercial banks will also suffer, because they don’t want more capital at this moment, because their capital is now in excess.

Second, the Government IPOs big corporations or gives more room to foreign investors in local companies. In this case, foreign investors would disburse money, and as the result, this would cause high inflation.

In the context of high inflation, any surplus money in circulation would make the situation ‘more dangerous’.

“The best solution to curb the inflation is to delay IPOs,” Dr Vu Dinh Anh concluded. However, if delaying IPOs, the equitization process would be slowed down, and this would begin another long story.

Source: TBKTVN.