Vietnam’s lack of dollars causes problems
“It takes us a whole week to make transactions at up to ten banks to raise USD1 million for a project,” said the Eurocham’s chairman Alan Cany at a workshop held by the National Financial Supervision Committee last week.
Because of the shortage of US dollars at banks, investors are turning to the black market and remain afraid to spend dollars because they are not sure of future exchange rate trends.
The situation was recently highlighted in the New York Times which carried an article entitled "Vietnam’s chronic currency weakness takes toll on firms".
It detailed: “For Ford, one of the greatest challenges doing business in Vietnam this year is not selling cars but finding enough U.S. dollars to pay its overseas suppliers on time.”
The article quoted General Director of Ford Vietnam, Michael Pease as saying: “"We’ve had days when the treasury guy’s come in and said: ’We just can’t get enough U.S. dollars’".
Benedict Bingham, the country director of IMF Vietnam explained that Vietnam doesn’t lack US dollars but Vietnamese like holding dollars which puts pressure on exchange rates. Bingham warned that stories like the one in the New York Times may put off foreign investors.
The vice chairman of the National Financial Supervision Committee Le Xuan Nghia said that tense in foreign currency and problems associated with exchange rates caused the fall of Vietnam in recent international ratings.
The World Economic Forum’s global competitiveness reports show that Vietnam’s competitiveness is going down from 68th in 2007 to 70th in 2008 and 75th in 2009. Meanwhile Nghia points out: “The world sees progress in Vietnam but there are two things that are going worse: administrative procedures and the foreign exchange market. Vietnam doesn’t lack US dollars but liquidity is poor.”
Investors also worry about risks related to government debt in emerging markets like Vietnam. According to the Asian Development Bank (ADB), Vietnam’s foreign exchange reserve dropped from $23 billion in late November 2008 to $17.3 billion in late June 2009. This reserve is only sufficient for imports for three months while there is a reduction of foreign direct investment, savings and investment in the private sector.
Economists say Vietnam dong will gradually devalue from now till the year’s end. This is a key reason for Vietnamese people to prefer holding US dollars, causing an imbalance in the monetary market.
Experts also say Vietnam’s recovery relies on government spending and the short-term interest rate subsidy policy. Under this policy, some enterprises have had access to short-term loans with an interest rate reduction of 4 percent. This reduction meant interest rates for Vietnam dong and US dollar were nearly equivalent so enterprises only wanted to borrow Vietnam dong to avoid exchange rate risks.
The demand for Vietnam dong rose quickly, causing the imbalance in the monetary market. It is said that when this policy stops (by December 31, 2009), the need for Vietnam dong will fall and the pressure on the monetary market will increase.
“Once Vietnam’s Forex market is not controlled effectively, the risk will still be big and macro stability is in danger,” Eurocham’s Cany said.
When banks can’t choose between raising interest rates and adjusting exchange rates, they are unable to deal with foreign exchange issues.
Withdrawal policy
Bingham suggests Vietnam should immediately stop the interest rate subsidy policy and strengthen its fiscal policy.
It will be very difficult for Vietnam to control exchange rates while foreign debt is high (accounting for 28.8 percent of GDP, according to Standard & Poor’s while government debt is 44 percent, according to the General Statistics Office and up to 48 percent according to the ADB), inflation may increase while the value of the US dollar is set to decrease.
“Vietnam can do as it did in 7-8 years ago – selling US dollars to enhance the liquidity or devaluing the Vietnam dong,” Cany said.
The IMF recommended this solution a long time ago. However, devaluing the Vietnam dong may cause shock and panic in the market.
Some experts agreed that Vietnam only needs to increase the flexibility in controlling exchange rates, not devaluing the Vietnam dong.
Vo Tri Thanh, vice director of the Central Economic Management Institute, said that tightening the monetary policy, applying a more flexible exchange rate controlling policy, having better coordination between the financial and monetary policies are all key measures.
However, the National Financial Supervision Committee’s Nghia said it is unable to immediately halt the interest rate subsidy policy. Adjustment should be conducted step by step based on carefully calculations and the trend of the national and international economy.
According to Thanh, Vietnam needs to take earlier steps than other countries in adjusting its policies. China and Indonesia planned to make changes in the first quarter of 2010.
