Forex liquidity surges, dollar supply is awash at banks, the local currency strengthens, and the dollar loses its appeal as a safe-haven asset among the wide public. All such facts seemingly can send policymakers into rupture with joy, but experts have voiced their warnings that complacency if any is not quite justified, as the stability achieved in the forex market now is just halfway to success. There remain huge tumbling blocks to remove, and huge problems to surmount.

The dollar fever is still fresh in many people’s memory when the greenback on the free market stayed high at over VND22,000 soon after the central bank devalued the local currency by 9.3% in early February. The rate quoted at banks then was much lower, but supply was scarce, and buyers had to pay a fee to make the formal rate not much lower than the black-market one, meaning the forex market was largely dictated by free-market forces.

But the sharp turnaround took place when the central bank issued new rules – one after another – to restore order in the forex market and to enhance confidence in Vietnam dong. Ever since, the US dollar has weakened step by step. The inter-bank rate fell from the peak of VND20,733 on April 19 to VND20,693 on April 28, the lowest rate since March 26. At banks, the commercial rate is even lower, as the public is increasingly selling the currency in anticipation of a weaker dollar in the coming time, says Vneconomy. At the Bank for Investment and Development of Vietnam, for instance, the amount of dollars bought from enterprises and individuals has increased by 40% recently, which is “a positive signal that the dollar-holding mindset is changing,” according to the paper.

Tuoi Tre observes that dollar sales from the public to banks increase as the formal rate is VND10-60 higher than that on the free market. Within a week, due to the increased sales, the dollar price has tumbled by VND265.

According to the newspaper, the latest move by the central bank to put the lid on dollar deposit rates at 3% annually is the decisive factor to make the greenback no longer attractive as an asset. This decision helps widen the interest rate difference between the dollar and Vietnam dong to between 11% and 15%, and thus quite many people seek to convert the greenback into Vietnam dong to enjoy higher returns.

Sai Gon Tiep Thi, quoting an unnamed source, says that the central bank is even mulling a new move to raise Vietnam dong deposit rate to 16% a year from the current 14% to attract more capital into banks in a move to restrict money supply to fight inflation on one hand, and to increase the attractiveness of the local currency on the other.

“The move shows the consistency and reasonability of the central bank in monetary management by stabilizing and strengthening Vietnam dong,” says the paper.

After a while, however, experts have jumped in to warn against complacency.

While the prevalence of Vietnam dong is appreciated, the falling appetite for the dollar will also be damaging. The low interest rate for the dollar will choke off the flow of foreign remittance into the country, according to Vneconomy.

Tuoi Tre, quoting a report from the HCMC branch of the central bank, says that foreign remittances into the city in April fell 19.6% against March to US$367.6 million. Bankers say the fall is due to lower interest rate as it no longer encourages deposits from foreign countries, according to the paper.

In another respect, Thoi bao Kinh te Sai Gon, in observing ‘a farewell to dollars’ among the public, says that the restoration of public confidence in Vietnam dong has just begun, but that confidence is held up by the wide interest rate difference between the two currencies only. “Once this anchor is dropped, Vietnam dong will face problem in gaining public confidence.”

Sai Gon Tiep Thi hails the sharp turnaround on the forex market compared to two months ago, saying the change is beyond expectations of all banks.

“When devaluing Vietnam dong by 9.3% in early February, a banking official said the aim was to stabilize the forex rate at VND20,500 to the dollar, an aim not believable by the public at the time, but the target is turning a reality now,” comments the newspaper.

However, the paper also quickly points to radical problems facing the local currency, the most striking one being the high inflation in the economy.

The shift of “smart capital” from the dollar to Vietnam dong may reverse when the interest rate difference is narrowed or when expectations run high on further depreciation of Vietnam dong. In the short term, the forex rate can be impacted by supply-demand balance, but in the long term, the forex rate will still be driven by the difference between local and international inflation rates, according to Sai Gon Tiep Thi. The paper stresses that accumulated inflationary pressure in the local economy will be translated into the pressure on devaluing the local currency. It is this pressure that has caused Vietnam dong to weaken by 30% between 2008 and now, but this pressure remains high.

“Therefore, though recent policies have paid off, such factors just have short-term impacts. If high inflation is not tamed, there will appear an inflationary spiral, leading to a sharp fall of Vietnam dong in the future,” says the paper.

The consumer price index as of end-April has neared 10% compared to end-December, and this high inflation rate is a blur on the picture of local economic performance. The stability achieved in forex market management will be a short-lived one and is just halfway to success if this fundamental problem is not properly addressed.

“The key task now is to harness inflation to restore confidence in Vietnam dong,” says Sai Gon Tiep Thi.

Source: Saigon Times daily.