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Economist allays forex concerns

Update: May, 09/2015 - 09:08
Economist Dr Nguyen Dinh Anh.

By deciding to devalue dong by 1 per cent on Thursday, the State Bank of Viet Nam (SBV) has not left any room for foreign exchange adjustment this year.

This is the second adjustment in 2015. It had earlier committed not to weaken dong by more than 2 per cent in 2015.

The 2 per cent devaluation has been considered as a ‘strong adjustment' and the move has raised concerns about its impact on inflation, public debts, and the market's confidence.

Economist Dr Nguyen Dinh Anh talked with Viet Nam News Agency about possible issues.

 How do you assess the central bank's decision on Thursday to weaken dong?

The central bank made this adjustment as pressure on dong in both official and flea markets had been holding up for months.

However, this devaluation was still in line with the central bank's plan to manage foreign exchange rates in 2015. It was also periodic as the central bank's decisions in previous years mostly came in mid-May.

It was also a flexible management measure taken by the central bank to cope with the volatility of the foreign exchange market and to be consistent with the central bank's policy of exchange rate management.

How will the adjustment impact macroeconomics and the market?

I think the adjustment of exchange rates will definitely affect the inflation index, as the country's economy deeply integrates with the world economy. Especially the country's imports, which account for a large proportion. Import value to date this year has been much higher than that of export [trade deficit in the year to date hit US$3.3 billion, never happened since 2011]. However, its impact on inflation will not be so strong.

Apart from this, dong was devalued, also by 1 per cent, in January this year. However, by April, inflation rose by only 0.8 per cent on average and nearly remained the same (up 0.01 per cent) against December 2014. So, it did not make any significant impact on inflation. Therefore, this adjustment will be the same as the previous time and the country will likely maintain its inflation index lower than the full year target.

What do you think about the opinion that if we adjust the exchange rate, public debt will increase?

In principle, when we adjust the exchange rate, we‘ll have to pay more for public debts in dong. However, this adjustment was only 1 per cent so that it will not be so large if convert it into dong.

Viet Nam pays its debts and interests in the US dollars and the government often uses a part of its collection sources in the greenback to pay debts. This way it will help reduce pressure on public debts, especially in the wake of the exchange rate adjustment.

In the past few years, the central bank often spoke about adjusting foreign exchange rates within a fixed band. Does it put the central bank in a difficult situation in regulating the foreign exchange market?

The central bank did not adjust foreign exchange rates until 2013. In 2013-14, it had adjusted the rates only once, in the middle of the year, and had also made a commitment to adjust the rates only in a 2-3 per cent band every year. In fact, the central bank never used up all room in years.

I think the commitment during 2012-14 contributed positively to macroeconomic stability (including the stability of dong value) and inflation control. During that time, we had a trade surplus, which helped the country improve its balance of payment and gain a high record of foreign exchange reserves.

This year, the central bank also committed to increasing the rate by no more than 2 per cent; it has so far used up all room. The central bank is obviously expecting to meet its commitment this year to help the country gain achievements similar to 2012-14.

However, the central bank should closely watch the market movements and based on the forecast of the balance of trade, balance of payments and the exchange rate of dong to the US dollar and other major currencies in the world, it should be able to make appropriate decisions.

Will this adjustment affect the market's confidence?

There are many ways to gain the market's confidence. For example, in 2012-14, to strengthen the market's confidence, the central bank made several commitments and actively met those commitments even without using up all room.

In 2015, the central bank can maintain the market's confidence by actively adjusting the orientation of the exchange rate management policy. I think it will not affect the market's confidence if the central bank still follows its adjusted plans and orientations. — VNS

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