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Experts remain divided on devaluing the dong

Update: April, 13/2015 - 08:36

Vietcombank listed the dollar exchange rate at VND21,630, around VND10 higher than on Wednesday.. — Photo vneconomy

by Thien Ly

At the close on Thursday, April 9, Vietcombank listed the dollar exchange rate at VND21,630, around VND10 higher than on Wednesday.

Others like Techcombank also increased the rate by VND5-10 to VND21,645.

On the free market too the greenback has risen strongly, sometimes reaching VND21,800.

In a statement posted on its website late last month, the State Bank of Viet Nam said the dong had been weakening against the dollar in recent times, much like other currencies around the world.

But it promised to ensure the dong's stability.

Indeed, despite the recent weakening of the Vietnamese currency, the exchange rate remains below the ceiling of VND21,673 set by the central bank.

There have been no big changes in foreign currency supply or demand, meaning companies and individuals' legitimate forex needs are being met.

In an recent interview with the media, an SBV official revealed that the central bank had bought a large amount of foreign exchange but was yet to sell any in the market since the rate started rising after Tet (Lunar New Year Festival), which has been blamed mainly on psychological factors in the wake of the dollar's rise against all major currencies.

The central bank fears the impact a severe dong weakening would have on the foreign debts owed by the Government and businesses.

According to the Ministry of Planning and Investment, 80 per cent of Viet Nam's foreign debts is in dollars. Thus, if the dong weakens by 1 per cent, the debts will rise by VND10 trillion (US$465 million).

Besides, the country's economy relies a great deal on materials and equipment imported, meaning any weakening would increase costs for domestic manufacturers, affecting their competitiveness and importing inflation, as economists like to describe it.

Viet Nam's foreign reserves are estimated at $36 billion while it registered a balance of payments surplus of $2.8 billion in the first quarter of 2015.

The surplus has allowed the central bank to keep the dong's movements within a 2 per cent band this year.

But analysts express concern about the impact the bank's policy of stabilising the forex rate will possibly have on the economy.

They point out that in the last few years the nominal exchange rate saw little change despite the country's raging inflation, a fact that has silently made the dong overvalued against the greenback.

Because of this virtual peg of the dong against the dollar, exporters have been facing lots of difficulties, even those in sectors with a natural advantage like seafood and textile and garment.

According to seafood industry group Vasep, the country's seafood exports value declined by 23 per cent year-on-year in the first quarter of this year, a record fall for the last five years.

Exports were down to all three main markets — the US (down 44 per cent), the EU (11 per cent) and Japan (15 per cent).

The euro and yen are sharply down against the dollar, the currency in which exporters mainly price their products, meaning the Vietnamese products are expensive for consumers in those two markets when their prices are converted into local currencies.

Keeping the forex rate unchanged is bringing pressure on banks' lending interest rates, with the Government wanting lower rates to offset exporters' losses due to a strong currency.

Meanwhile, the banks' ability to further cut lending interest rate is low because most of them now rely on people's deposits. If the banks further cut the deposit interest rates people would likely withdraw their savings and invest into other channels.

The analysts call for devaluing the dong by 2 to 3 per cent to not only make exports more competitive.

This will also encourage domestic production to replace imports and reduce imports of consumer goods at the same time, they point out.

Others approve of the central bank's strategy of keeping the exchange rate steady but warn the bank needs to take measures to improve export competitiveness.

They want exporters to focus on the US because the market is showing clear signs of recovery and to sign export contracts with European and Japanese importers in the euro or yen.

They also want exporters to buy insurance against exchange rate risks.

Business tycoons

In February, at a workshop held to discuss solutions to develop macadamia farming in Viet Nam, Him Lam Joint Stock Company and LienVietPostBank unveiled a VND20 trillion (US$941.3 million) macadamia growing project to be implemented within five years.

Him Lam is not the first major real estate company to invest in agriculture. Several years ago Hoang Anh Gia Lai, one of the country's biggest, entered the sector and has been pretty successful.

In 2008 Hoang Anh Gia Lai decided to focus on rubber, sugarcane, corn, and oil palm after realising that while investment in real estate could bring extraordinary profits, it was also very risky.

As a result, by mid-2014 the company was growing rubber on 44,500 hectares, sugarcane on 8,000ha, oil palm on 17,300ha and maize on 5,000ha.

It also owned a herd of 230,000 cows worth US$300 million.

The company's efforts have paid off. At its 2014 annual general meeting the company reported it had so far invested VND18 trillion ($837.2 million) in high-tech agriculture and attained net profits of VND1.748 trillion ($83.2 million) that year, up 62 per cent from 2013.

Hoa Phat Group, a leading private industrial group in Viet Nam, has outlined a new investment strategy under which it has set up a VND300 billion plant to produce animal feed in the northern province of Hung Yen. The company expects revenues of VND3 trillion ($142.86 million) in the first three years of operation.

Vingroup, possibly the best known real estate and tourism companies in the country, has a chartered capital of around VND5.5 trillion ($261.90 million) and a number of mega property and tourism projects in several major cities across Viet Nam.

It has applied for a licence to set up large-scale farms to grow organic vegetables and fruits and clean agricultural products in the northern province of Quang Ninh.

The fact that home-grown business tycoons are putting their money on agriculture shows the sector's enormous potential, but there has been dearth of investment in it so far.

The animal feed industry is a typical example. Against a demand of 18-20 million tonnes in 2015 and 25-26 million by 2020, the country only produced 14.7 million tonnes last year. The rest was imported at a cost of billions of dollars.

In this scenario, the investment in agriculture by the big boys comes as a very good sign.

With their deep pockets and business savvy they can take the sector on the modern development path, enabling it to compete with foreign rivals. This assumes great significance in the context that the country is all set to join an ASEAN common market and sign a number of free trade agreements.

But investment in the agriculture sector poses certain difficulties for them, to overcome which they require active support from the Government.

They find it hard to buy large areas for high-tech agricultural activities because current regulations on land compensation and taxes are vague. — VNS

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