Top Government economist calls exchange rate ‘biggest threat’

VietNamNet Bridge – Le Xuan Nghia, Deputy Chairman of the National Finance Supervision Council, told participants in a top level workshop that State Bank policies have distorted the credit market and complicated foreign exchange management.

Nghia spoke at a workshop organized by the World Bank and Vietnam’s Institute of Social Studies on August 18, the same day the State Bank devalued the dong by another two percent.  Prime Minister Nguyen Tan Dung and an array of Vietnamese and foreign economists were in the audience.

Nghia, according to Thoi Bao Kinh Te’s report, believes Vietnam’s economy has recovered from the shock of the global financial crisis, but difficulties persist.  On the plus side, the GDP growth rate edged higher in the second quarter of 2010, exports have grown rapidly, and disbursements of foreign direct investment (FDI) capital are higher than a year ago.  Among negatives, inventory volume remains high, it’s harder to attract FDI, and the trade deficit is twice what it was a year ago.

Nghia forecast that the rate of increase in the consumer price index (CPI) will slow, registering 0.3 percent in the third quarter and 0.5 percent in the year’s last three months, thus holding total inflation for the year to under eight percent.

The credit ‘knot’

Nghia called credit the biggest problem for the banking system and for the growth of the economy.

By the end of July 2010, deposit interest rates at 36 banks had reportedly fallen to an average of 11.09 percent per annum, while interest rates on loans to ‘priority clients’ were an average of one percent lower than in the first quarter.  Even so, Nghia pointed out, most borrowers must pay 15-16 percent per annum.

“Small and medium enterprises now find it very difficult to secure bank loans,” Nghia said. “If that can’t be fixed, it will be hard to maintain stable growth.”

Saying that the failure of interest rates to ease as expected is due to “administrative barriers,” Nghia criticized State Bank policies.  Though funds on the open, or interbank, market have been profuse and cheap, commercial banks still cannot access this capital.  This, Nghia explained, is because the central bank has required commercial banks to increase their capital adequacy ratio by raising more of their capital from depositors.  The only way they can do that is to pay higher deposit interest rates.  If banks must pay depositors high interest, they cannot afford to reduce lending interest rates.

“If the State Bank of Vietnam insists on keeping unreasonable regulations like Circular 13, it will be increasingly hard to attain the Government’s target of reducing the deposit interest rate to ten percent and the lending interest rate to twelve percent,” Nghia warned.

An abnormal foreign exchange market

The foreign exchange market was tense in the whole first quarter of 2010 with a serious imbalance in foreign currency supply and demand. The gap between official and black prices reached 200 dong per dollar.

Pressure on the exchange rate was eased [by a 3% devaluation – VNNB] in the second half of the second quarter.   The dollar price on the black market was briefly even lower than the dollar price quoted by commercial banks. “That was an abnormality, not a positive result of exchange rate management,” Nghia noted.

According to him, the fact that the black market’s exchange rate was lower than the official market reflected an overly narrow gap between the dong and dollar lending interest rates. “This led to a big ‘virtual supply’ of foreign currency on the market.  It not only distorted supply and demand of foreign currency, but also created big difficulties for exchange rate management,” he said.

Therefore, Nghia calls it a good thing when the black market dollar price is slightly higher than the price commercial banks can charge.

However, another problem persists: commercial bank dollar buying and selling rates are always at the top of the allowable band.  When this happens, and when our banks lay extra charges on foreign currency buyers, Nghia said, it’s “a clear sign that the dollar supply has tightened.”

Nghia predicted that especially in the fourth quarter, dollar price movements will “become complex” because of changes in foreign currency supply and demand. He expects the trade deficit to continue to grow but the demand for dollar loans to decrease due to a small drop in the dong lending interest rate.  Businesses will be scrambling to collect dollars they’ve earned so they can pay off bank loans.

Nghia said that as long as Vietnam’s inflation rate is relatively high, the dong will tend to lose its value against the dollar.  At the moment, he added, the dong is overvalued.

“Thus the biggest financial threat in the medium term is the exchange rate,” Nghia concluded, “with the dong under pressure from the budget deficit and reduced foreign exchange reserves relative to imports.”