“It is an indication of improved liquidity and market clearing,” said Daniel Hui, HSBC’s foreign exchange strategist. Currently, local banks are allowed to trade the greenback 3 per cent either side of the State Bank’s interbank exchange rate.

Hui added that past persistent dong depreciation pressure against the greenback was the result of fundamental imbalances and exacerbated by market dynamics that encouraged dollar hoarding. However, in early 2010 the State Bank set cap of 1 per cent per year on corporate dollar deposits and forced state-owned enterprises sell their dollar holdings.

According to a Vietcombank source, these moves discouraged dollar hoarding and lifted greenback onshore supplies. Hui said that the restoration of more normal forex market liquidity conditions was an essential self-reinforcing step in bolstering exchange rate stability.

“However, a sustained recovery will still require improvements in fundamentals,” said Hui. Foreign direct investment (FDI) commitments are rebounding with $5.6 billion in the first four months, more than twice that of the year prior.

From a monetary policy front, Hui said that without a change in the benchmark base interest rate, overall conditions had tightened considerably from late last year, with the expiration of the 4 per cent, per year interest rate subsidy.

Last year, under negative effects of global financial crisis, the Vietnamese government decided to subsidise a 4 per cent per year borrowing rate for local enterprises. “However, Vietnam’s current account deficit and resulting external funding requirement, combined with still-low level of foreign exchange reserves will leave it relatively more vulnerable, compared to the rest of Asia, to any external funding stress that might result from current global sovereign credit worries,” Hui said.

But, a BIDV source argued that Vietnam was well cushioned with other dollar supplies. “Some $1 billion from international bond sale, approximately $4 billion loans from the World Bank and Asia Development Bank and increasing amount of foreign portfolio investment are more than enough to cover,” said the BIDV official.

He added that foreign investors were coming back to government bond auctions recently. Earlier this year, Vietnam successfully sold $1 billion worth of 10-year bonds to the international market.   

Source: VIR