Dollar demand stable, though pressures remain

Vietnamese banks have enough dollars to keep the dong from succumbing to immediate pressure from higher-than-expected inflation and a persistent trade deficit reflected in this month’s data, traders said.

But economists warn that could worsen later in the year, putting the currency under renewed downward pressure.

On Monday the Ministry of Planning and Investment estimated the trade deficit hit an estimated US$1.05 billion in September.

The deficit for the first nine months of the year rose to $8.58 billion and the government expects the full-year shortfall to reach about $14 billion.

Annual inflation this month accelerated for the first time since March, hitting 8.92 percent. September’s consumer price index rose 1.31 percent from last month, the highest monthly rise since February, the government said last week.

Nevertheless, the dollar/dong exchange rate has been steady since the State Bank of Vietnam devalued the currency by 2 percent on Aug. 18.

“Banks now have ample dollar funds so they can deal with client borrowing and trading,” said a foreign exchange manager at a Hanoi-based lender.

Official and unofficial exchange rates have been close to the 19,500 trading band limit since the devaluation. At 0250 GMT on Monday there was a 40 dong, or 0.2 percent, difference between dollar/dong bid prices on interbank and unofficial markets.

The gap is sometimes seen as an indicator of pressure on the currency to depreciate.

Overnight dollar interest rates for loans on the interbank market have ranged between 0.41 percent and 0.46 percent, Reuters data showed.

Banks have benefited from dollar inflows at businesses that tend to receive payments from overseas during the later months of the year, traders said.

Still, Nguyen Minh Phong, an economist at the Hanoi Research Institute for Socio-economic Development, said the widening trade deficit and modest foreign direct investment inflows would keep the dong under pressure.

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Dollar demand stable, though pressures remain

Vietnamese banks have enough dollars to keep the dong from succumbing to immediate pressure from higher-than-expected inflation and a persistent trade deficit reflected in this month’s data, traders said.

But economists warn that could worsen later in the year, putting the currency under renewed downward pressure.

On Monday the Ministry of Planning and Investment estimated the trade deficit hit an estimated US$1.05 billion in September.

The deficit for the first nine months of the year rose to $8.58 billion and the government expects the full-year shortfall to reach about $14 billion.

Annual inflation this month accelerated for the first time since March, hitting 8.92 percent. September’s consumer price index rose 1.31 percent from last month, the highest monthly rise since February, the government said last week.

Nevertheless, the dollar/dong exchange rate has been steady since the State Bank of Vietnam devalued the currency by 2 percent on Aug. 18.

“Banks now have ample dollar funds so they can deal with client borrowing and trading,” said a foreign exchange manager at a Hanoi-based lender.

Official and unofficial exchange rates have been close to the 19,500 trading band limit since the devaluation. At 0250 GMT on Monday there was a 40 dong, or 0.2 percent, difference between dollar/dong bid prices on interbank and unofficial markets.

The gap is sometimes seen as an indicator of pressure on the currency to depreciate.

Overnight dollar interest rates for loans on the interbank market have ranged between 0.41 percent and 0.46 percent, Reuters data showed.

Banks have benefited from dollar inflows at businesses that tend to receive payments from overseas during the later months of the year, traders said.

Still, Nguyen Minh Phong, an economist at the Hanoi Research Institute for Socio-economic Development, said the widening trade deficit and modest foreign direct investment inflows would keep the dong under pressure.

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• Dollar demand stable, though pressures remain
• Greenback firmer on signs of rising demand
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Dollar demand stable, though pressures remain

HANOI - Vietnamese banks have enough dollars to keep the dong from succumbing to immediate pressure from higher-than-expected inflation and a persistent trade deficit reflected in this month's data, traders said.

But economists warn that could worsen later in the year, putting the currency under renewed downward pressure.

On Monday the Ministry of Planning and Investment estimated the trade deficit hit an estimated $1.05 billion in September, sending the deficit for the first nine months of the year to $8.58 billion.

The government expects the full-year shortfall to reach about $14 billion.

Annual inflation this month accelerated for the first time since March, hitting 8.92 percent. September's consumer price index rose 1.31 percent from last month, the highest monthly rise since February, the government said last week.

Nevertheless, the dollar/dong exchange rate has been steady since the State Bank of Vietnam devalued the currency by 2 percent on Aug. 18.

"Banks now have ample dollar funds so they can deal with client borrowing and trading," said a foreign exchange manager at a Hanoi-based lender.

Official and unofficial exchange rates have been close to the VND19,500 trading band limit since the devaluation. On Monday there was a VND40, or 0.2 percent, difference between dollar/dong bid prices on interbank and unofficial markets.

The gap is sometimes seen as an indicator of pressure on the currency to depreciate.

Overnight dollar interest rates for loans on the interbank market have ranged between 0.41 percent and 0.46 percent, Reuters data showed.

Banks have benefited from dollar inflows at businesses that tend to receive payments from overseas during the later months of the year, traders said.

Still, Nguyen Minh Phong, an economist at the Hanoi Research Institute for Socioeconomic Development, said the widening trade deficit and modest foreign direct investment inflows would keep the dong under pressure.

"Vietnam's FDI disbursement has only started to pick up and cannot significantly support the exchange rate", Phong said.

Vietnam's total balance of payments deficit may reach $4 billion this year, it said.

Higher demand for dollars for import later in the year, combined with Vietnam's thin foreign exchange reserves, would contribute to the pressures, economists said.

Foreign investors disbursed an estimated $8 billion in Vietnam in the first nine months of this year, a rise of 4.8 percent from the same period last year. Meanwhile, Vietnam's economy expanded by an estimated 6.52 percent in the first nine months of 2010 from the same period a year earlier.

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Standard Chartered forecasts stable months ahead

Following the government’s tightening of prices for essential industrial and consumer products, inflation is expected to remain stable in the coming months, an expert at Standard Chartered say.

“Inflation in the immediate future should remain under control, especially if global food and energy prices do not surge significantly,” Tai Hui, Southeast Asia Regional Head of Research under Standard Chartered Bank, said in a statement. “However, we do not believe price controls will be effective in the event of a sustained surge in input prices.”

Vietnam’s latest economic data for August shows a continuation of the trend during the first half of 2010. Inflation is expected to remain relatively calm at 8.2 percent year-to-year, or 0.2 percent from month-to-month.

Meanwhile, the trade balance is expected to maintain an even keel. “We expect Vietnam’s trade deficit to persist in the medium term, further devaluation of the dong is on the cards for 2010 and 2011,” Tai Hui said.

On August 18, the State Bank of Vietnam devalued the dong by revising the US dollar-dong reference from 18,932 from 18,544. The bank maintained the daily trading band of 3 percent on either side of that rate.

The trade deficit has hung around $1 billion per month for much of 2010, he said. He attributes the even keel to strong export growth and cooling import growth.

Meanwhile, disbursed foreign direct investment, aids and remittance flows have been recovering steadily. Hence, the overall depreciation pressure on the dong ought to be lower than in previous years when inflows were waning on the back of the 2008 global financial crisis, Tai Hui said. Firm domestic demand is absorbing imports, he added.

Given the Vietnamese authorities’ growth bias, Hui believes that further devaluations are likely in order to support exporters. “The timing of further moves will be politically driven,” he said. “But we believe that a rise in commodity prices, which will in turn drive inflation and the trade deficit higher, could be a trigger.”

Sharp rises in gold prices and the dollar could also prompt dong depreciation to intensify. “In line with these predictions, we have adjusted our dollar-dong forecasts without altering our overall profile,” he said. “We now predict that the dollar-dong ratio will hit 19,500 at end of the third quarter; and 19,900 at the end of the fourth quarter.”

Another important implication of the dong devaluation is that the authorities will not be able to push interest rates lower, despite stable inflation. The government has, for some months, been trying to persuade commercial banks to reduce lending rates in order to promote lending and facilitate growth, Tai Hui said.

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