Better foundation for forex stability

The central rate announced by the SBV on May 13 was VND23,047 per U.S. dollar, down VND10 per dollar against the rate on the weekend of the previous week. This was the first fall of the rate after a week of continuous rise. The reference rate quoted at the SBV’s Transaction Office was VND23,200 per dollar for buying and VND23,688 per dollar for selling.

At the end of May 13, the rate at Vietcombank was VND23,275 per dollar for buying and VND23,395 per dollar for selling. On the free market, a dollar fetched VND23,330. The dollar prices at commercial banks dropped VND20-50 per dollar against the rate in the mid-previous week. The rates at many commercial banks reverted to the level a week ago before the start of the surge.

Commenting on the forex rate rise at the recent Banking Forum 2019 held by the SBV and Thoi bao Kinh te Saigon of the Saigon Times Group, Pham Hong Hai, HSBC Bank Vietnam general director, said the sudden forex rate rise was due to the U.S.-China trade tension which has caused a psychological impact on the market. “Fresh moves by these two countries do not affect forex supply and demand in Vietnam, but have a psychological impact on the market,” Hai said. Furthermore, Hai added, commercial banks also expected huge portfolio investments into the market. Though portfolio investment transactions did not actually take place, commercial banks had sold foreign currencies days before to keep a negative forex position and waited for actual transactions to buy back the currencies at a low rate. However, they had to buy the currencies at a high rate when transactions did not happen as expected, causing a market strain.

Last week, the Chinese yuan was devalued by over 1% and many other foreign currencies also fluctuated. Amid the market instability, many people would seek safe heavens, and the U.S. dollar gives them a safer feeling.

Favorable supports

Hai said essentially Vietnam’s economy has many favorable support factors. The SBV has tools for active regulation, forex supply and demand does not experience sudden fluctuation, and the situation where enterprises cannot buy foreign currency in need does not occur. “These factors form a good foundation for the confidence that the SBV can maintain forex stability,” Hai said.

According to the deputy general director for foreign exchange of a big commercial bank, with more than US$8 billion bought over the past four months, the SBV has ample foreign currency to balance demand, such as US$560 million in trade deficit in April and part of the foreign currency needed after the foreign currency transaction between enterprises and banks was turned from the credit to the trading relations. He noted that the forex rate would fluctuate more often in the upcoming time instead of staying stably as in the first months of the year due to the impact of the trade war on major currencies worldwide. “Still, the recent rise in foreign direct investment and foreign portfolio investment, especially the capital from Korean and Chinese investors seeking investment in Vietnam through mergers and acquisitions, will increase foreign currency supply for the country,” he said. “So, the possibility that the SBV has to sell foreign currency for market intervention as it did last year is thin.”

Speaking at the banking forum, Nguyen Tu Anh, deputy head of the SBV’s Monetary Policy Department, said in recent years the SBV has been more active to achieve stability for the market and the macro economy amid the global economic changes. At the end of a year, the central bank has worked out different scenarios with their impacts in the following year.

Anh noted that many emerging challenges early this year, such as the global economic slowdown and the tension in U.S.-China trade and possibly in the U.S.-EU trade that may intensify trade protectionism, have triggered a capital flight from emerging economies, especially countries with unstable macro economy. However, capital has still flowed into Vietnam, evidence that the country has stable macro economy and gets good appreciation from foreign investors. The stable foreign exchange rate is one of the reasons for investors to keep the peace of mind.

Commenting on the forex management, Pham Hong Hai said the SBV is much smarter in its foreign management. It has used many instruments without wasting ample resources, and instead, has been able to leverage the advantage of the media and technical measures to supply foreign currency for the market timely whenever there is demand. Last year when the Chinese yuan lost its value, the SBV flexibly adjusted the forex rate instead of using the forex rate pegging as in previous years, a move that created big confidence for the market. “However, the forex situation last week shows that the market psychology is not completely stable whenever there is upheaval in the global situation,” Hai said. “We are still in the process of building confidence, and the SBV should have a consistent management method to prevent the psychology of foreign currency hoarding in the future.”

Seconding the remark that the SBV is smarter in its forex management, Dr. Vo Tri Thanh, former rector of the Central Institute for Economic Management, recommended three most important things that the SBV should do—they are increasing proactivity, stabilizing expectation and using monetary tools flexibly to handle forex rates in the final months of the year.

Thanh noted that the pressure on forex rates remains big this year, and the upward trend seems dominant when the currency war has yet to come to an end. Meanwhile, the global economy could slow down but the oil price has still been rising. However, he argued that given the possible inflation of around 4% and the SBV’s proactive forex management, the forex rate this year can only increase around 2%.