VINACHEM

VietNamNet Bridge - Financial institutions believe the dong will depreciate further in the last months of the year after losing one percent of value since mid-June.

Thoi bao Kinh te Vietnam quoted the director of a HCM City-based enterprise as saying that he was still wavering between buying and not buying dollars at this moment. He planned to buy $3 million for payment for imports, but he was not sure if it was the right time to buy dollars.

If he does not buy dollars now, he may regret it later if the dollar price goes up further.

If he buys dollars now, he fears that the dollar price will go down as the State Bank has vowed to stabilize the exchange rate.

The State Bank earlier this year stated that it would stabilize the dong/dollar exchange rate in 2014. This was the fourth time it made the commitment.

The exchange rate was stable in the last three years, with no exchange rate adjustment, i.e., the State Bank fulfilled its commitments.

But the fourth commitment was broken when the bank decided to devaluate the dong by one percent in mid-June.

The interbank exchange rate announced by the State Bank increased from VND21,236 per dollar to VND21,246 per dollar on June 19.

The devaluation was described as foreseeable and necessary, even though the foreign exchange reserves have climbed to the highest peak of $35 billion, according to the Hong Kong and Shanghai Banking Corporation (HSBC).

The dollar price rose sharply by VND20-50 per dollar on the days just after the exchange rate adjustment was announced, reaching VND21,400 per dollar, but it later went down.

The dollar price quoted by commercial banks on July 3 was VND21,330 per dollar, a sharp decrease of VND50 per dollar over one week before, according to Thoi bao Kinh te Vietnam.

However, economists believe that the dong should depreciate further.

Do Thien Anh Tuan from the Fulbright Economics Teaching Program, the dong depreciation would bring big benefits, stimulating domestic production.

If the dong value is kept at high levels, businesses have to pay high capital mobilization costs, and therefore, cannot step up their production.

If so, they would rather import products to sell domestically rather than make products at their factories.

Therefore, Tuan said, the weak dong would help domestic enterprises make products at more competitive costs.

As such, the one percent devaluation of the dong is not enough to help businesses save on production costs.

HSBC believes that the one percent exchange rate adjustment is minor, and will not have a big influence on the market.

Dr. Le Hong Giang, a renowned banking expert, said the State Bank should think of devaluing the dong more sharply than one percent, because the modest dong depreciation is not enough to offset the weaker competitiveness caused by high inflation in previous years.

HSBC, in its July report on Vietnam’s market prospect, predicted that the official exchange rate would be VND21,250 per dollar by the end of the year, before it is adjusted to VND21,500 per dollar by 2015.