Volatility returns to foreign exchange rates

June 04, 2018 - 09:00

On May 29 the State Bank of Việt Nam adjusted the đồng-US dollar exchange rate, weakening the Vietnamese currency by VNĐ9 to VNĐ22,605 per dollar, which represented the greenback’s biggest rise so far this year.

On May 29 the State Bank of Việt Nam adjusted the đồng-US dollar exchange rate, weakening the Vietnamese currency by VNĐ9 to VNĐ22,605 per dollar, which represented the greenback’s biggest rise so far this year.  

Following the central bank’s move, many banks immediately adjusted their exchange rates.

Vietcombank decided to reduce the đồng’s value by VNĐ45, setting its dollar buying rate at VNĐ22,820 and selling price at VNĐ22,890.

The exchange rate on the open market stood at VNĐ23,000 to the dollar.

But on the following day (May 30) the dollar lost value. Eximbank cut its buying and selling rates by VNĐ50 to VNĐ22,770 and VNĐ22,860, and Vietcombank by VNĐ35 to VNĐ22,785 and VNĐ22,855.

The SBV reduced the interbank exchange rate by VNĐ15 to VNĐ22,590 per dollar.

The sharp fluctuations belied the predictions of many experts, who had said exchange rates would remain stable through the year.

In the first four months of the year the rates were indeed steady thanks to certain conditions, one of which was the strong GDP growth in the first quarter, estimated at 7.38 per cent, the highest quarterly rate in 10 years.

Overseas remittances reached a record US$63 billion, while foreign direct and portfolio investments poured in. 

A report by HSBC had predicted the đồng to remain steady against the US dollar and end this year at VNĐ22,900.

It was predicated on high capital inflows and the đồng’s weakness against other currencies in the region.

Explaining the sudden fall in the đồng’s value against the dollar, analysts said the relentless rise in the US Federal Reserve’s dollar base rate under a roadmap and the sharp rise in interest rate on US bonds made the greenback stronger.

Recent global political and economic events have also caused pressure on Việt Nam’s foreign exchange market.

A large trade deficit and sharp drop in the stock market in May also affected the exchange rate.

According to latest data from the General Statistics Office, the trade deficit topped US$500 in May.

On May 29 the benchmark VN-Index on the HCM Stock Exchange closed at 931.75 points, its lowest level in more than five months.

The financial market reported an upward trend in foreign currency lending in spite of the central bank’s efforts to reduce it.

In 2017 foreign currency loans had risen six times. In the first quarter of this year đồng loans were up by 3.3 per cent while foreign currency loans registered a 5.4 per cent increase.

Foreign currency loans are attractive because their interest rates are always much lower than on đồng loans, and for a long time now the exchange rates have been steady.

The rates on foreign currency loans now range between 3.5 per cent and 4 per cent while those on short-term đồng loans average 7-8 per cent.

After edging down on May 31 the đồng showed signs of weakening again on June 1. The SBV announced a central rate of VNĐ22,595 to the dollar, depreciating the đồng by VNĐ5. Its reference rates were VNĐ22,700 and VNĐ23,248.

Analysts believe the forex rates will continue to remain volatile on the back of high US bond yields and other reasons.

They have called for diversifying currencies used for enterprises’ import, export and investment activities since Việt Nam is integrating deeply with the global economy.

To reduce risks related to the forex rate volatility, the SBV has called on enterprises to use tools like hedging.

Among the most effective tools for foreign exchange risk management now is currency derivatives, including forward, swap, option and future contracts, which enable enterprises to buy or sell specific quantities of a particular currency pair at a future date.

Since 2008 many companies have indeed been using currency derivatives.

According to experts, banks need to offer services that can help enterprises mitigate foreign exchange risks in their business transactions.

The central bank needs to continue with its flexible foreign exchange regime and ensure the foreign exchange market accurately reflects supply and demand.

Vietnam Airlines’ woes

Only 10 investors registered to take part in an auction held by the Ministry of Transport (MoT) on May 22 to sell its share purchase rights in Vietnam Airlines’ upcoming share issuance, according to the Hà Nội Stock Exchange.

In the event, it managed to find buyers for only 270,000 shares (coded HVN), or 0.073 per cent of the total shares being issued.

Earlier, the Ministry of Transport, as Vietnam Airlines’ State stakeholder, planned to auction 371.5 million share purchase rights, an equivalent to 57.9 million shares that will be issued by VNA to reduce the State ownership in the corporation as required by the Government.

Individuals and organisations, including overseas Vietnamese and foreigners who meet the conditions prescribed by the law were eligible to buy the share rights from the ministry.

The ministry set the starting price for each share right at VNĐ6,026, and hoped to collect a minimum of VNĐ2.23 trillion (US$98.32 million)  from the auction.

In January last year Vietnam Airlines listed on and began trading on UPCoM.

Later, in July, Vietnam Airlines planned to issue over 191 million shares to existing shareholders including the ministry in the ratio of 15.57 shares for every 100 shares at a price of VNĐ10,000. But the plan has not been carried out so far

An airline executive said the price of the additional HVN shares in Vietnam Airlines’ upcoming share issuance will be based on the market price at the time the share purchase rights were offered for sales, plus the issue price of each share, VNĐ10,000.

This means that investors would be able to buy HVN shares that are going to be issued at the price of around VNĐ48,660 each.

So why did investors disdain the additional shares in Vietnam Airlines’ upcoming share issue? 

Market observers said the sharp decrease in the price of Vietnam Airlines shares in recent times might have been the main reason.

Currently the carrier’s shares are trading on the market at around VNĐ35,600, much lower than the offer price of VNĐ48,660.

The expectation that Vietnam Airlines’s profits would be significantly lower this year is another reason that caused investors to shy away.

For 2018 the airline has set a target of achieving a turnover of over VNĐ97.073 trillion ($4.28 billion), up 14.3 per cent from last year, but its pre-tax profit target is only VNĐ2.421 trillion ($106.65 million), a year-on-year drop of 23.3 per cent.

The profit decrease is attributed to the sharp rise in crude oil prices expected this year.

Since there were few takers for the HVN share purchase rights, a solution was arrived at during the company’s annual general meeting: The ministry will buy VNA’s additional shares and then look for a way out.

A plan to increase VNA’s charter capital to VNĐ27 or 28 trillion was mentioned to help the ministry reduce its ownership of the airlines from the current 86.16 per cent to 51 per cent as required by the Government. — VNS