The Saigon Times Daily: Why has the dong been falling against the dollar year after year?

- Louis Taylor: Economic theory suggests countries that run consistent trade deficits will see currency devaluation. Although Vietnam’s trade deficit has generally been offset by foreign investment and remittances from Vietnamese abroad, it is expected to stay at or above its current level for the next few years, because Vietnam is in the middle of building up its major infrastructure. This expectation is mainly what is keeping pressure on the currency. Another element is people’s expectation of inflation in Vietnam, which has been relatively high in the recent past.

So how about the future of the dong?

- Under Standard Chartered’s own forecast, the Vietnam dong is to see moderate depreciation through 2011 to around 20,800 per dollar. However, we believe that there may be some mild strengthening of the Vietnam dong in 2012 as Vietnam’s growth attracts foreign investors back into the country.

What tools does the State Bank of Vietnam (SBV) have at the moment to stabilize the exchange rate?

- The State Bank of Vietnam has demonstrated its ability to alter interest rates to reflect market conditions, and this remains a key policy tool in determining pressures in the foreign exchange market. Measures to discourage hoarding of U.S. dollars or gold would also have an impact on the value of the Vietnam dong. If the SBV can successfully reduce expectations of currency depreciation and of inflation, then that is likely to stabilize the currency.

As the dollar interest rate in Vietnam is so high, at up to 5% per year, is it possible foreign capital will flow into Vietnam because of this high rate?

- The high rates some banks are offering for dollar deposits are only available to individuals, and not to the corporations or institutional investors who manage large amounts of money. So it is difficult to see large volumes of dollars coming to Vietnam from foreign individuals. However, the rates may encourage Vietnamese workers abroad to send more dollars back to Vietnam.

What’s your view on the current rate hike race among local banks? Should the central bank intervene?

- The deposit rate hike by local banks is derived from several factors. One is to ensure prudent levels of liquidity that banks will need to comply with the introduction of Circular 13. Also, the new Credit Institution Law requires banks to increase their capital to a minimum of VND3 trillion, and to make efficient use of this capital banks will need to grow their deposit base as well as their assets. So the rate hike by banks is linked to the SBV’s measures to ensure a healthy and safe banking system.

The rate hike by the SBV also partially addresses the issue of the foreign exchange rate for the Vietnam dong, as well as the anticipation of high inflation. To create stability in the value of the dong, tightening monetary policy is the right decision. When the dong interest rate is too low, people will tend to spend, spurring inflation. Low interest rates also make it cheap for people to buy and hold on to the U.S. dollar, which undermines the value of the Vietnam dong.