SBV should attend to dollar loans coming due, correct interest rates

VietNamNet Bridge – A deputy chairman of the National Assembly’s Economic Committee says the State Bank of Vietnam’s two percent devaluation was correct, but must be followed by measures to lower interest rates, adjust the spread between dong and dollar borrowing costs, and thus ensure adequate dollar supply to the market..   

Vu Viet Ngoan, talking to Thoi bao Kinh te Vietnamreporters, observed that the demand for foreign currencies may increase in the last months of the year because enterprises will need dollars to pay matured foreign currency loans. The State Bank (SBV) should pay attention to this annual surge in demand when it considers foreign exchange market management.

Thoi bao Kinh te Vietnam: The State Bank has reduced the dong’s value against the dollar by 2.1 percent. Was that correct?

Assemblyman Vu Viet Ngoan: There was pressure on the foreign currency supply and demand. I think the dong/dollar exchange rate adjustment will help balance that, and will also help restrict imports and encourage exports in the last months of the year. The two percent adjustment is absolutely reasonable in current conditions.

However, the exchange rate is not the only factor which decides the adequacy of foreign currency supply to the market.  Rate adjustment can only help ease the tension.  Achieving a balance in foreign currency supply and demand still depends greatly on the trade deficit, fiscal policies and public policies. For example, to make many products for export, Vietnam has to import eighty or ninety percent of the input materials.

TBKTVN:  So you doubt that the dong/dollar exchange rate will be stable, at least from now to the end of the year?

Vu Viet Ngoan: Adjusting the exchange rate will help balance foreign currency supply and demand. However, to stabilize the market, SBV still must keep close watch and apply comprehensive measures that balance supply and demand.

Besides monetary policies, we need measures to attract foreign currencies, encourage exports, strengthen foreign direct and portfolio investment, and increase Vietnam’s income from overseas remittances and tourism.  We need also to curb demand for non-essential goods.

TBKTVN:  Can you clarify what you meant when you said that SBV needs to make ‘reasonable adjustments’ in the foreign exchange market?

Ngoan: First of all, the interest rates on dong deposits should be higher than dollar interest rates. The gap between the two rates should be as high as the expected depreciation of the dong against the dollar. This would much depend on the forecast inflation rate from now to the end of the year. I think that the current gap benefits dong borrowers, and if maintained from now to the end of the year, it will stimulate the demand for dong loans.

However, the interest rates for both the dong and foreign currency interest rates are overly high; they ought to be lowered to encourage businesses to borrow capital to expand production. This is really a difficult calculation for monetary policy makers.

When we take measures to manage the foreign exchange market, it is essential to pay attention to the bank loans in foreign currencies that businesses will have to repay before long.  Typically the demand for foreign currencies by businesses increases toward the end of the year.  However, if the current account, or trade, balance can be stabilized, that pressure on the exchange rate will conversely be eased in the last months of the year.

TBKTVN: How will the dong/dollar exchange rate affect the inflation rate in 2010?

Ngoan: In principle, the exchange rate adjustment will influence the expenses and production costs of enterprises, thus affecting prices and the inflation rate, but I think this 2.1 percent adjustment will not have a remarkable impact.

Source: Thoi bao Kinh te Vietnam