How much will the dollar devaluate?

The VND will surely increase in value against the greenback, but people are trying to guess how high the local currency value will be.

In the latest dispatch No 319 on the measures to fight against inflation, the Prime Minister stipulated that Vietnam may accept a maximum 2% dollar price fluctuation this year. In the context of the continued dollar devaluation, this means that the dollar value may decrease by 2% by the end of the year. The dollar price was at VND16,010/US$1 earlier this year, and it may be VND15,690/US$1 by the end of this year.

Meanwhile, in the latest news, the State Bank of Vietnam has decided to raise the foreign currency trading band from +/-0.75% to +/-1%, commencing from March 10. This means that commercial banks’ transaction exchange rate may be 1% higher or lower than the official exchange rate announced by the State Bank of Vietnam.

Until March 10, the trading band of +/-0.75% had been applied. However, in fact, no commercial bank accepted buying dollars at the price which was just 0.75% lower than the official exchange rate. For example, the official rate was VND16,030/US$, and the rate commercial banks should have bought dollars at was VND15,869/US$1, but they only bought at VND15,600 or refused to buy.

However, it remains unclear if the dollar value decrease will reach the allowed ceiling level of 2% or not. The greenback has lost 0.6% of its value so far this year. The growing tendency of the dollar devaluation is making exporters earn less money, while benefiting importers, bringing profit to dollar borrowers, but losses to dollar holders.

Limiting foreign-made products consumption

The revaluation of the VND will make import commodities become cheaper. Cheaper products will encourage consumption and lead to a higher trade deficit. It is expected that the trade deficit will reach $17bil this year. More imports will mean more commodities on the market and more choices for consumers, however, this will threaten local production.

Therefore, experts said that the Government will have to control imports in order to reduce the trade deficit. It will order to limit the imports of unnecessary products and instruct commercial banks to tighten consumer credit. Banks have begun more cautious in funding car purchase deals, and tightened real estate credit.

Commercial banks may apply technical measures (e.g they require more security money) in order to force importers to limit consumer imports.

If credit grows by 30%, who will suffer?

As the State Bank of Vietnam has decided, the maximum credit growth rate in 2008 will be 30%, a low ceiling for a fast growing economy. Experts said that if the central does not put the cap of 30%, the real credit growth rate may rise to 40% this year.

The credit growth rate must be capped at 30% in order to help curb inflation, which also means that it will be more difficult for businesses and individuals to borrow money from banks.

Banks will tighten loaning to some subjects like real estate speculation, consumer product imports and ineffective projects, but they will be encouraged to pour money into agriculture. As the food prices are skyrocketing, lending to farmers to improve the agricultural production will be prioritized.

Interest rates will go down

It is highly possible that the interest rate will go down as the Government has stated that it would not accept high interest rates. The high interest rates banks now apply prove to be unaffordable by businesses.

Under the latest decision by the central bank, the deposit interest rate is now capped at 12% per annum. However, the rate will be lowered in some days, as requested by the central bank.

The central bank is trying to curb in the interest rate increases when it keeps basic interest rates for March unchanged compared to February, though the market interest rates saw sharp increases in March. It has also announced that the ceiling interest rate on the interbank market will be lowered to 9-10% per annum.

Source: Tuoi tre