Friday, October 28 2016


Forex rates to remain under pressure

Update: August, 17/2015 - 07:53

The US Dollar Index, an index of the currency's value relative to a basket of foreign currencies, has sometimes crossed 100 points, much higher than the 80s where it had hovered for several years. — Photo

Compiled by Thien Ly

One of the prominent economic happenings globally in recent times is the appreciation of the US dollar, which has affected most countries including Viet Nam.

The greenback has strengthened relentlessly against most major currencies including the euro and yen.

The US Dollar Index, an index of the currency's value relative to a basket of foreign currencies, has sometimes crossed 100 points, much higher than the 80s where it had hovered for several years.

The forex rate in Viet Nam has been affected not only by this appreciation of the dollar but also by several other factors at home and abroad.

The State Bank of Viet Nam doubled the daily dong trading band to 2 per cent on either side on August 12 as China devalued its yuan by a total of nearly 5 per cent against the US dollar.

Rising imports combined with sluggish export growth has sent Viet Nam's trade deficit in the year-to-date soaring to US$3.37 billion, a year-on -year increase of 16.4 per cent.

The flow of foreign currencies into Viet Nam so far this year has also been very modest, with overseas remittances estimated at $13-14 billion in the first half and foreign direct investment at $6.3 billion.

Meanwhile, the large gap between global and domestic gold prices has spurred the illegal import of gold and thus an outflow of dollars.

All these have hit liquidity in the foreign exchange market and therefore the dollar has surged. On August 5 the buying/selling rates on the free market increased by VND20 and 30 to VND21,910 and VND21,930.

After remaining stable for a few days, the price resumed its rise due to the yuan depreciation.

On August 12 all banks raised their dollar selling rates by around VND200 after the central bank decided to double the trading band.

Vietcombank bought and sold at VND21,990 and VND22,060, and BIDV at VND22,000 and VND22,080.

The rising rate benefits some and disadvantages others in Viet Nam. Obviously, straightaway, a weakening dong has benefited exporters and hit importers badly.

Yet it is not a windfall for exporters since they depend on imports for their production.

The Government as well as businesses now have to pay more to service for their foreign-currency loans.

Analysts said the forex rate is likely to remain under real pressure. This is because businesses' import of machinery and equipment usually increases in the last few months of the year. This demand is expected to be high this year since the economy has shown clear signs of recovery, spurring large demand for the greenback.

Analysts also warned of a possibility that the US's Federal Reserve would raise interest later this year, which would cause the dollar to further strengthen.

But they believed that the Vietnamese central bank would keep its promise that the dong would not depreciate by more than 2 per cent this year since the country's foreign currency and gold reserves are still rather plentiful at $37 billion and 10 tonnes.

VN ranks high

The Merger & Acquisition (M&A) Forum held in early August by Dau Tu (Investment) newspaper and AVM Vietnam heard Viet Nam ranked high in ASEAN in the number of M&A deals and the value of foreign investment in them.

Between 2005 and 2009 there were 307 deals worth US$2.89 billion, which placed the country in lowly sixth place in ASEAN behind Singapore, Malaysia, Indonesia, Thailand, and the Philippines.

In the first half of this year Viet Nam was in second position with 77 deals behind only Singapore with 93. Vietnamese firms involved in M&A received US$1.12 billion in overseas money, third behind Singapore and Indonesia.

The banking sector saw several successful M&A deals. Stymied by high levels of non-performing loans and cross ownership, the industry has been reforming and restructuring since 2011.

The central bank has pushed for takeovers and restructuring of weak banks.

How have banks fared after mergers?

According to industry insiders, most of those involved in the M&A deals have gradually managed to significantly strengthen both their financial capacity and competitiveness.

The Sai Gon Commercial Bank was the first lender to enter into an M&A deal. Three years after merging with the First Joint Stock Commercial Bank (Ficombank) and the Viet Nam Tin Nghia Commercial Joint Stock Bank (TinNghiaBank), it has seen growth in assets and outstanding development in technology, established a nationwide network and has a highly professional staff.

Significantly, the SCB has settled a majority of the non-performing loans it took over from the three banks. Last year it sold bad debts worth nearly VND11 trillion (US$506 million) to the Viet Nam Asset Management Company, and in the first seven months of this year, VND1.6 trillion (nearly $72.73 million).

Post-merger another lender, the Sai Gon-Ha Noi Commercial Joint Stock Bank (SHB), has also made dramatic improvement.

It has reduced its bad debts ratio from 12.88 per cent at the time of its merger with HaBuBank in 2012 to 2.66 per cent now. This year, the bank expects to achieve total assets of VND200 trillion ($9.09 billion) and to increase its prescribed capital by 18 per cent to VND10.48 trillion ($476.36 million) by year-end. It targets a 19.4 per cent increase in deposits to VND152 trillion ($6.91 billion) and a 11 per cent increase in lending to VND115.546 trillion ($5.25 billion).

The Housing Development Bank too has performed well since its merger with DaiABank.

But many difficulties still remain for them.

Companies, their main clients, have not really recovered yet; many segments of the real estate market remain in a slump; the securities market has been volatile due to volatility in the domestic and global financial markets.

The bad debts the weaker banks brought along to the merger remain a problem since, due to certain reasons, they are not easy to resolve even though they are backed by mortgaged assets.

Since the banks have to use most of their earnings to make provisions for bad debts, their profits are sharply down.

For instance, SHB estimates it has used VND7 billion of its profits for bad debt provisioning this year.

Thus, in the first quarter SHB's pre-tax profits fell 25 per cent year-on-year.

Foreign shipping

Foreign shipping lines have the lion's share of Viet Nam's cargo transport market, with a majority of companies still choosing them to import or export goods.

According to the Viet Nam Logistics Business Association, there are some 40 foreign shipping firms in the country, accounting for a mere 4 per cent of the number in the sector. But they transport more than 80 per cent of the country's imports and exports and dominate the vital sea lanes connecting Viet Nam with the US and Europe.

Meanwhile, over 1,300 local operators focus on the domestic market and the routes between Viet Nam and regional markets.

They are unable to compete with their foreign rivals who are much superior in terms of finance, human resources, management, and technology.

Therefore, they usually handle imports on CIF (cost, insurance and freight) terms and exports on FOB (free on board) terms.

Local companies do not have a lot of confidence in the vessel fleets and services of Vietnamese logistics companies.

Foreign firms flaunt modern technology, quality services, reasonable charges and on-time delivery.

To protect domestic logistics companies, the government announced some policies but to little avail mostly because the companies themselves fail to put in enough effort.

Analysts said the Government should have a mechanism to force them to further invest in technical infrastructure, technologies and management. — VNS

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