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What’s behind SBV’s decision to raise the exchange rate?   2008-09-16 - TBKTVN

The State Bank of Vietnam (SBV) on September 15 announced the interbank market exchange rate of VND16,512/US$1, an increase of VND3/US$1 over the previous level, and began purchasing foreign currencies. The two moves show that the central bank is interfering in the market with the VND tending to revaluate against the dollar.


The central bank had raised the interbank market exchange rate twice already, to VND16,506/US$1 mid last week, and then to VND16,509/US$1 on September 12.


According to SBV, the VND/US$ exchange rate has seen a downturn since mid July.


The exchange rates quoted by commercial banks last week hovered around VND16,600/US$1, while the rates on the black market were VND16,600-16,620/US$1.


Explaining this, Nguyen Manh, Capital Source Director of the Bank for Investment and Development of Vietnam, said: “The exchange rate is decreasing, which shows oversupply, especially in the north.”


Experts have warned that two problems will occur when the VND appreciates.


First, the VND revaluation will hinder the growth of exports. Le Quoc An, Chairman of the Vietnam Textile and Garment Group (Vinatex), said that the current exchange rate of VND16,600/US$1 and the trading band of +/-2% are not really a problem for the garment industry. However, if the exchange rate goes down further, the profit of garment companies will fall dramatically, while the net profit of the industry proves to be very modest.


“The State Bank of Vietnam, which holds a big volume of foreign currencies, should intervene in order to allow exports to bring profit,” An said.


Second, if the central bank does not make timely and strong intervention to stabilise the exchange rate, the cheaper foreign currencies will lead to more imports, which will worsen the current serious trade deficit.


In the first eight months of the year, Vietnam’s trade deficit was $16bil, or 36.8% of total export turnover, or two-fold higher than the trade deficit of 2007.


As the central bank has raised the interbank exchange rate to VND16,152/US$1, banks now have the right to quote prices at VND16,842/US$1 at maximum, higher than the previous levels of VND16,550-16,560/US$1 (purchase) and VND16,600-16,610/US$1 (sale).


The moves by the State Bank of Vietnam to raise the exchange rate and purchase foreign currencies show that it is trying to support exports, considered tremendously important for development, a stimulus for production and the creation of more jobs.


It is clear that the central bank is moving towards making the VND weaker to encourage exports. However, a problem has arisen – the move may lead to higher inflation.


The consumer price index (CPI) in August 2008 increased by 28.32% over August 2007, while the CPI in the first eight months of the year increased by 22.14% over the same period of 2007.


However, an official from the State Bank of Vietnam said that this is not really a worrying problem. Foreign portfolio investment flow is believed will not be as strong as last year, and thus will not pressure the foreign currency market, since the stock market has not fully recovered

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