Dragon economy faces forex challenges

[BIG RICKENS]

Leading economists are urging Vietnamese policymakers to liberalise their foreign-exchange regime sooner than later, while the country is still building ample reserves and huge amounts of investment capital continues to flow into the market from abroad.
The International Monetary Fund, which always advocates free-floating currencies, last week issued a statement calling for greater flexibility in the foreign-exchange markets in Vietnam.

http://www.bangkokpost.com/Business/09Jun2007_focus01.php

[lance]

never mind my mistake.....nothing follows

[DealOrBuyDinar]

This is my interpretation of the fundametals related to following article. Let me know if you guys see it another way.

When you have a growing economy like Vietnam's you run the risk of hyper-inflation. One way to counter hyper-inflation is to raise the value of your currency which can be done through a reval or more effectively by allowing it to trade freely so the market can determine it's value.

Some of the negatives being discussed in this article are actually a discussion the pressure Vietnam is experiencing which are the natural result of a growing economy. In other words, the 'negatives' discussed are in fact the reasons Vietnam is under growing pressure to either revalue their currency or move it onto the foreign exchange while balancing the needs of exports. The edit's within the article are my own.

Let me know if you have anyone has additional thoughts.

Kind Regards,

Ken

ASIA FOCUS

Dragon economy faces forex challenges
NOLAN CRAWFORD
Leading economists are urging Vietnamese policymakers to liberalise their foreign-exchange regime sooner than later, while the country is still building ample reserves and huge amounts of investment capital continues to flow into the market from abroad.

The International Monetary Fund, which always advocates free-floating currencies, last week issued a statement calling for greater flexibility in the foreign-exchange markets in Vietnam. http://www.bangkokpost.com/Business/090607_focus04.jpgA US$100 banknote is pictured in front of 100,000-dong notes in Hanoi. The IMF, which always advocates free-floating currencies, last week issued a statement calling for greater flexibility in the foreign-exchange markets in Vietnam. Although the statement is not new, the timing was important, say analysts and economists. - BLOOMBERG NEWS


Although the statement by IMF deputy managing director Takatoshi Kato is not new, the timing was important, say analysts and economists.
This year, economists both in the public and private sectors expect Vietnam's current account to swing into deficit, while inflationary pressures remain strong and foreign debt accumulation by both the public and private sectors mounts.

Barclays Capital, in a recent report, predicted that the current account deficit could hit $1.1 billion this year and $2.1 billion in 2008, due to the rising costs of freight, insurance, interest payments and the repatriation of profits. (Edit: here is a great example, if you have a rising cost in freight, insurance, etc. but you don't allow your currency to rise or float with the free market it will continually and progressively will buy less and less: inflation.)

"Implementing monetary and exchange-rate policies in the presence of growing capital flows, managing fiscal policy when aggregate demand pressures are building up while prices are increasingly liberalised, and ensuring debt sustainability when investment needs are large are some of the immediate challenges [to the Vietnamese economy]," said Mr Kato from IMF. (Edit: My interpretation of this is that Mr. Kato of the IMF is saying Vietnam needs to allow the value of it's currency to increase by "Implementing monetary and exchange-rate policies.")

Vietnam maintains a managed float regime for the dong. The State Bank of Vietnam (SBV) uses the average exchange rate in the interbank market during the previous business day as the official rate. Commercial banks are then allowed to trade within 0.5% on either side of the SBV quoted rate.
Over the past few weeks, the US dollar has fluctuated between 16,050 and 16,140 dong. http://www.bangkokpost.com/Business/090607_focus01.gif
A pegged rate usually requires higher reserve coverage both to stabilise the exchange rate and ensure credibility of the forex regime itself.
In addition, when the exchange rate has been fixed, or "managed" in Vietnam's case, over a long period, it can result in a false perception of stability, according to IMF and Asian Development Bank (ADB) economists.
As well, there are a lack of incentives for the private sector to hedge against risk, leading to a buildup of unhedged foreign currency liabilities. Something similar to this happened in Thailand during the financial crisis of 1997.

The latter point - unhedged liabilities - is a concern given the huge amounts of foreign-denominated bonds the government and state enterprises intend to issue over the next few years. A more immediate worry in the forex market is the flood of foreign capital into the booming stock market, says Phi Dang Minh, head of the central bank's Foreign-exchange Department.

According to World Bank estimates, foreign investors as of the end of March had pumped more than $4 billion into the stock market, controlling about 28% of its capitalisation. "Exchange-rate management has become more challenging with the massive growth of local bourses, because a minor change in the rate could have a wide range of effects," Minh said recently. Just as challenging as the inflow is the fear of an outflow of foreign capital.

"Any sustained period of market volatility would lead to a reversal in the balance of payments dynamic and cause a sharp decline in forex reserves," wrote Barclays Capital economists.

There are already signs of a weakening bourse. Last week, the State Securities Commission decided to cap total commercial bank loans for stock investments at three percent of total outstanding loans.
Regardless of the fact the new policy has yet been enacted, the announcement caused net selling among foreign funds and forced the VN-Index to as low as 1,040 points, down 4% over the previous week.
In the end, though, officials seem eager to keep the forex market relatively stable, especially against key currencies such as the dollar, yen and euro. Policymakers want to ensure that Vietnamese goods remain price-competitive, especially as it tries to integrate into the regional supply chain. (Edit: Meaning, that while Vietnam is under economic pressure to increase the value of their currency they have to consider how it will impact exports too. The higher the value of their currency, the more expensive their goods become.)

"Concern about export competitiveness and forex reserve sufficiency to cope with a possible reversal in capital flows appears to have a significant bearing on policy," said a Citigroup economist. With the growing short term risks and likelihood the current account this year turns into a deficit, Vietnam still has a relatively stronger foreign reserve position than it had in the past, a trend that Barclays, Citigroup and HSBC all expect to see continue. At the end of 2006, reserves stood at $13.4 billion, or about 3.8 months of import coverage. Barclays Capital predicts reserves could reach $18.4 billion by the end of this year, as foreign direct investment (FDI) and official development aid continue to flow into the country.

The foreign-reserve cushion has not stopped economists from urging officials in Hanoi to liberalise the country's forex market. This would not only involve floating the dong but also the imposition of the correct measures to control capital flows.

The IMF's Mr Kato said the challenges facing the market would "require determined and, at times, complex policy responses" - hence a need for further reform in monitoring foreign exchange.

[Sponson]

Agreed. From what I've seen, the SBV is trying to use every economic tool at its disposal to cool their economy except for considering the possibility of a reval - something it appears that they'll soon be forced to consider, IMHO.

:wave:

[DealOrBuyDinar]

Agreed. From what I've seen, the SBV is trying to use every economic tool at its disposal to cool their economy except for considering the possibility of a reval - something it appears that they'll soon be forced to consider, IMHO.

:wave:

I'm glad to see that someone else concurs. They really are just about out of options it seems. I was really hoping China would succumb to US pressure to reval it's currency. I have a feeling that is all that is holding Vietnam back. Vietnam incidentally is being pressured in turn by China to revalue it's currency.