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Vietnam Business » Vietnam Financial News » After rocky spell, dong/dollar establish stable relationship

After rocky spell, dong/dollar establish stable relationship

SBV has reported that in the first quarter of 2010, Vietnams foreign currency reserves increased by two billion dollars. Meanwhile, the World Bank forecasts that reserves may reach $17.5 billion by the end of 2010 after dipping to $15.2 billion late last year.

SBV has confounded critics who said Vietnams currency was getting out of control.

The State Bank (SBV) has succeeded in stabilizing the interbank exchange rate at 18,544 dong per dollar, while purchasing dollars to build up reserves.

Foreign currency supply and demand have been in balance and liquidity high. Banks are able to manage their foreign currency positions themselves without buying dollars, yen and euros from the State Bank. Export companies, which have earnings in foreign currencies, now sell their foreign currencies to banks instead of hoarding dollars, as was common several months ago. From mid-April to mid-May, the State Bank purchased $1 billion from banks.

The dong/dollar exchange rate quoted by commercial banks is now sometimes lower than SBVs ceiling level (the interbank exchange rate plus three percent). On June 15, commercial banks were trading dong for dollars at 18,945-18,990 to $1. The exchange rate on the curb market has sometimes been even lower than the rates quoted by commercial banks, something thats rarely seen. In mid-June, the curb rate was 19,010 dong to the dollar.

With the dong/dollar exchange rate has been stable, enterprises have lost interest in speculating against the dong, and individuals are less apt to buy dollars to keep under their pillows. Thus dollar deposits at banks have increased more slowly than dong deposits.

According to SBV, dong balances held by clients of credit institutions increased by 2.89 percent in May, and foreign currency deposits by 1.19 percent.

Meanwhile, the demand for loans in foreign currencies has increased rapidly. SBV says outstanding loans rose 1.86 percent in May - dong credit was up 1.53 percent, while foreign currency credit was up 3.16 percent. Thats considered to reflect a preference for the lower interest rates still in effect on foreign currency loans now that fears of further dong devaluation have eased.

Foreign currency loans typically bear somewhat lower interest rates lower than dong loans. In the recent past, however, businesses did not dare to borrow in dollar because they feared theyd have to repay in more expensive foreign currencies.

If the current rapid increase of the loans in foreign currencies continues, an imbalance of the foreign currency supply and demand could emerge by the end of 2010.

Le Xuan Nghia, Deputy Chairman of the National Finance Supervision Council, points out that most of the foreign currency loans are short term loans due in less than one year). Do Minh Toan of ACB Bank says many, mostly with 6-9 month terms, will come due in September and October. Pham Hong Hai of HSBC predicts a dollars squeeze then, because businesses will be hunting for dollars to pay debts back to banks.

Theres a cyclical factor, too. The demand for dollars always increases sharply in the last months of years because businesses need dollars to import goods. In September and October of 2009, businesses in HCM City alone spent $3 billion to import goods.

Vietnam Business And Financial News Network. Source [english.vietnamnet.vn]

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