Summary of Main Points from Meeting of BIDV and JPMorgan with PM Dung
15/06/2008 08:17 pm
Laws/Hà Nội - Vietnam has no plans to devalue the Vietnamese
Dong (VND). Looking at the balance of payments and the country’s
overall economic situation, he sees no reason for a devaluation. They
have studied the impact of a devaluation at this time and concluded it
would not be helpful. Generally, normal supply and demand forces should
determine the value of the VND, and with this in mind it is useful to
note that, even at this time of stress in markets, the overall Balance
of Payments showed a small US$1 billion surplus in the first five
months of 2008. Currently the exchange rate fluctuation band announced
by SBV is about +/- 1 per cent, lower than the estimated fluctuation
band of +/-2 per cent for the year 2008. With the current reserves
surplus, the PM believes that the +/- 2 per cent fluctuation band
should be flexibly adjusted with reasonable steps, and at this moment,
even stronger and clearer messages to the market about Vietnam’s
resolve to maintain VND stability needs to be sent.
He is very aware that the black market rate is
currently not close to the official band rate. However, he believes
that it is not “true” supply and demand (for example, for trade or
investment) that is determining the black market rate now, but rather
rumors, speculation and part of commercial bank operation. He also
knows that offshore VND markets are pricing in a devaluation of 20-40
per cent. He believes that this is not valid assumption.
So far, the State Bank of Vietnam (SBV) has not
taken direct steps in the black market in terms of enforcement or
intervention. He is meeting with the enforcement agencies to instruct
and check the registered black market players (money changers, etc.)
who are by law not to engage in speculation to stop this activity.
SBV intervention so far has not been large and has
only been through certain market players. Going forward, intervention
will increase in size and broaden in terms of counterparties.
The SBV has already been discussing both a crack
down on black market speculators and a ramping up and broadening of its
intervention activity. In his opinion, both would be justified.
As far as potential foreigner portfolio outflows, those are manageable, relative to the size of SBV’s FX reserves.
The USD level of FX reserves will be announced
publicly. So far, the SBV has only reported the level to international
financial institutions like the World Bank and IMF, and usually
relative to monthly imports. To boost confidence, he will ask the SBV
if it is possible to report publicly the dollar level of FX reserves.
He is very aware that Vietnam has the ability to
tap the swap lines set up through the Chiang Mai Initiative. Drawing on
the swap lines has been studied and they are keeping it in view.
In general, he is confident that the balance of
payments will return to a significant surplus in the medium term.
Indeed, the problem for the past five years had been that the surplus
was getting too large and was helping to fuel onshore liquidity. With
this medium-term view in mind, the SBV can intervene more agressively
now, if that is what it takes to restore market confidence in the
government's ability to maintain a stable VND.
As for maintaining local confidence in the VND,
there are two keys. First, depositors must be assured of the overall
stability of the banking sector. Second, VND deposit rates must be
attractive. He will act to make sure both occur.
The imposition of capital controls is not being
considered. He believes that it will be a mistake and goes against
Vietnam’s commitment to moving to freer markets.
Growth will have to suffer this year. The new
target of 7 per cent reflect this, based on the directive to slow
capital expenditure by the government and state enterprises.
Inflation is too high and he is committed to
bringing it down. But that cannot happen immediately. Over time,
inflation will decline back to single digits by 2010, possibly earlier.
When international prices for commodities are high, there is very
little the government can do. Vietnam’s rice producers are having a
banner year, with production well above last year’s harvest. However,
he cannot tell farmers to sell at a lower price if they can get a much
higher price by exporting their rice.
Vietnam will not enter into a program with the
IMF. When he was the SBV Governor 10 years ago, he was the one who said
then that Vietnam does not need the IMF yet. In his opinion, the same
is still true today.
Vietnam has many reform issues it must address in
order to continue to grow robustly and improve the lives of its people.
These include reform of the legal system, the entire socio-economic
infrastructure, income disparities, corruption, and the like. The PM
remains fully committed to continuing to address these issues over the
medium term. In the immediate term, confidence in the VND must be
restored.
Source: VCCI
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