After seven months maintaining the inter-bank forex rate at VND18,932 to the dollar, the central bank succumbed to pressure to increase the inter-bank rate to VND20,693 and imposed the trading band at 1% either side compared to the previous 3%.

In a statement posted on its website right after the decision, the central bank said it would manage the inter-bank rate in a more flexible manner. This stance was proved as SBV the following day raised the inter-bank market rate to VND20,713.

The change is seen as an effort by the central bank to contain the unofficial forex rate and to better control the dollar pool. The gap between the two forex rates has immediately narrowed, but it is still rather wide to be bridged.

Following the SBV’s decision, the unofficial market boosted the dollar by VND150 to VND21,500 on Friday morning, and then higher to around VND21,600 during the weekend.

Applause from banks and enterprises

The rate adjustment has been welcomed by banks and experts as this move would help erase the two-rate mechanism on the market, allowing the dollar price to reflect more exactly the demand and supply on the market.

A joint-stock banker said that the higher dollar price would encourage enterprises to sell their dollar earnings to banks and thus would help to increase the bank’s dollar supply.

Banks have immediately raised the dollar price, with most last Saturday maximizing their dollar selling price to VND20,920 for one dollar, or some VND680 lower than the unofficial rate compared to the gap of VND1,900 earlier.

Commenting on the sharp devaluation of Vietnam dong, banking expert Le Tham Duong said that the large magnitude of devaluation was suitable as the forex rate had been maintained low for long.

“In fact, for fear of adverse impacts on the macro economy, the central bank has not for a long time revised up the forex rate as needed,” he said and added that this adjustment would help stabilize the foreign exchange market.

However, how long the forex market will be stable depends on other macro measures taken by the Government, he noted.

The forex adjustment also removes a big headache for enterprises over the big gap between the two forex rates.

Earlier, despite the quoted dollar rate of VND19,500 at banks, enterprises always had to pay a higher price to buy dollars plus extra fees, which all could not be manifested in their balance sheets because it was not legal. Therefore, enterprises had to suffer losses on the rate difference.

Prediction

Some international experts while hailing the forex adjustment also predicted that the central bank would further devalue Vietnam dong later this year.

Researchers of Standard Chartered Bank in a report issued last Friday said that the dong devaluation announcement should provide further relief to the balance of payments, and ease downward pressure on the foreign exchange reserves.

However, the latest devaluation could also lead to higher imported inflation in the months ahead, especially when combined with rising global commodity prices, they said.

The researchers said they expected one more devaluation in the second half this year as rising CPI inflation, a widening trade deficit and low exchange rate credibility continue to put weakening pressure on the dong. The exchange rate is forecast to hit VND21,800 by the third quarter and stay there until the end of the year.

Seconding the view, the research team of HSBC in a report on the same day said that for the market to regain confidence in the dong, authorities need to show a stronger commitment to fighting inflation by raising rates and addressing some of the structural imbalances contributing to the large trade deficit, including the competitiveness of some State-owned enterprises. At present, this does not seem to be on the agenda, said the report.

Moreover, the latest depreciation may have a further negative impact on inflation via higher import prices, to add to pressures on commodities and food prices. Despite this latest move, the pressure for Vietnam dong and dollar forex rate remains on the upside and the researchers think depreciation pressure will persist with another devaluation likely in the third quarter.

HSBC’s researchers forecast the forex rate would be VND21,500 by the third quarter and remain to the end of 2011.

Source: SaigonTimes.