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Central bank can manage exchange rates

Update: November, 12/2015 - 09:53
Viet Nam's foreign exchange policies are impacted by outside factors, especially the exchange and interest rates in large economics around the world.

Vietnam News Agency's Bnews reporter asks Nguyen Duc Do, deputy head of the Financial Economic Institute at the Ministry of Finance's Finance Academy, about these issues.

Nguyen Duc Do. — VNS Photo

What impact do exchange and interest rates in large economics, like the US's rate increase and China's currency depreciation, have on the Vietnamese economy?

When currencies of other economies fall against the US dollar, the goods produced by these economics become cheaper. That would have a negative impact on Viet Nam's economy.

However, in fact, there is not a large impact on the economy because Viet Nam's export growth has mainly depended on the growth of the world economy. When the global economy grows strongly, buyers have higher incomes, and they consume more goods. Therefore, Viet Nam has achieved 10 per cent growth in exports every year mainly due to economic growth.

What factors affect the local market when Viet Nam proactively adjusts its exchange rate?

If Viet Nam adjusts its exchange rate, the adjustment would have an impact for a medium period of time. However, there are no impacts on exports immediately after the adjustment.

When the SBV adjusts the exchange rate between the dong and the US dollar, companies continue to price their goods in dollars but their revenue in dong will be higher.

So the increase in benefits for exporters will change the structure of the economy, and that is a major impact on the local economy.

Therefore, Viet Nam should adjust its exchange rate when other economies adjust theirs. Viet Nam should regularly adjust the rate by 1-2 per cent every year. If the nation makes large adjustments to the exchange rate, it will have a negative impact on the economy. In this case, people will have expectations of a sharp depreciation of the currency. That will make many people convert from the dong to US dollar, leading to a lack of dollar and higher interest rates. That will mean enterprises pay more interest on loans.

What exchange rate policy should Viet Nam adopt?

I think Viet Nam should adjust the exchange rate between the dong and the dollar by 2-3 per cent every year. The adjustment of 5 per cent in total so far of this year was a little high though the rate was calculated carefully by the State Bank of Viet Nam (SBV).

According to the SBV, after a strong depreciation of the dong, those holding US dollar will sell them because they think the SBV will not depreciate the currency further.

In fact, after the central bank adjusted the exchange rate, the US dollar dipped before recovering. People bought dollar to deposit in banks, increasing dollar deposits in the banking system.

In the medium and long terms, Viet Nam's trade balance could be positive or negative, but the balance of payments will remain positive due to high foreign direct investment and overseas remittances.

Therefore, Viet Nam is completely able to stabilise the exchange rate for a long time. The Government has confirmed that Viet Nam has enough dollars to stabilise the exchange rate in the medium term.

I think Viet Nam should not adjust the exchange rate by more than 3 per cent a year to steady the situation.

What should Viet Nam do when impacted by outside factors like the US's interest rate hike and China's depreciation of the yuan?

There are two kinds of outside impacts. Firstly, the impact comes from the capital market with capital flows. When interest rates go up, money will flow into the economy, but this situation is for developed markets. For Viet Nam, the national market is not closely linked with the US, and so it would not suffer much impact from the US's interest rate hike.

The second impact is on people's psychology. I think we should be careful about the second impact. People have a tendency to hold US dollar due to the US's interest rate hike.

So the State Bank of Viet Nam should pay attention to the interest rates on the dollar. If banks commit to not adjust the interest rates, people will not have a reason to keep dollar. The commitment will increase people's trust and that will keep the exchange rates steady.

The US's interest rate hike will have an impact on the psychology of the people, but people's psychology will also depend on the central bank's capabilities and commitments.

It is difficult to see a depreciation of the Chinese yuan in the near future.

I think China will keep the yuan steady against the dollar and not devalue it sharply.

However, I stress that Viet Nam should also pay attention to inside factors, not only the policies of other countries.

What do you think about the central bank's policies to manage the market in the past?

The State Bank's policies for the local market have been successful in the past. The bank has rolled out policies to cool down the gold fever though it did benefit from a drop in global gold prices.

The bank has had successful policies like the ban on gold trading, monopoly over gold production, use of SJC gold and ban on banks accepting gold deposits.

When faced with a bad debts situation, the SBV has committed to not let banks' operations stall due to the bad debts.

It has adjusted exchange rates in a timely manner when the global market amended monetary policies. Then the bank cut interest rates on US dollar deposits and restricted businesses' trade in foreign currencies.

The central bank is also committed to stabilising exchange rates, leading to stability in the local market.

I think with [its large] foreign exchange reserves, the SBV has the capability to keep exchange rates steady. — VNS

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