Dong will stabilize in the near future
In a recent interview, Dr Le Anh Tuan, research director of Dragon Capital, said that although Vietnam is still facing problems of high inflation, a number of issues on the foreign exchange market, many indicators show that most foreign investors have confidence in the stability of money into Vietnam.
More people are concerned about the dong is overvalued compared to the actual value, which causes disadvantages to international trade. What's your view on this issue?
This is a reasonable concern. However, if you use this issue to recommend the devaluation or exchange rate adjustments of dong, I think it is not reasonable. There are two problems.
First, the determination of the dong overvalued or below the real value is not easy. Economists often use real effective exchange rate (REER) to value a currency. REER of the dong means the exchange rate between dong with a basket of foreign currencies of countries with which Vietnam has trade relations, but has been adjusted for inflation of these countries. If the dong REER appreciates, the competitiveness of Vietnam's goods will be less and vice versa. However, the REER is not simple, it depends on the base year for comparison, the change of trading partners as well as inflation of these partners.
Second, the problems are related to the exchange rate in all aspects of economic life, and not only foreign trade. Dumping the dong should be very cautious because this may increase the burden on foreign-currency debt of the government and businesses, affecting the confidence of investors.
In your opinion, what level of the pressure on devaluation of Vietnam will be in 2011?
Since 2007, dong has experienced three stages of large price fluctuations. Each phase has been due to various factors "directly" leading, so the processing in each stage of course was different. In 2008, large fluctuations in the forex market were because foreign investors sold about $3 billion bonds to withdraw capital when inflation was very high. In the last months of 2009, exchange rate fluctuations were due to the too big supply of dong in the market, and smuggling activities in the gold market causing the scarcity of US dollars. This was also the year that the errors in balance of payments hit $12 billion. In the last months of 2010 and early 2011, the foreign exchange rate fluctuated in part by increased foreign currency credit in early 2010, the dong devaluation expectations, in addition to low foreign exchange reserves and high inflation.
One noticeable thing is recently despite high inflation, the dong has been continuously appreciating. This shows that in every different times, different factors will affect the exchange rate.
Looking at the balance of payments, we can easily see the amount of dollars flowing into Vietnam still larger than the outflow of dollars. However, Vietnam's foreign exchange reserves have declined continuously since 2008, this is due to errors in the balance of payments, mainly due to hoarding of dollars in the population. That problem manifested in their faith in the dong, so to handle the matter of foreign exchange, Vietnam must create people confidence in the local currency.
However, the good news is Offshore Pressure Index - the confidence index of foreign investors in dong - shows that foreign investors said that the dong will stabilise in the near future.
According to Pressure Offshore Index, in the middle of 2008, foreign investors believed that the dong would depreciate about 30 percent within 6 months. This index also showed that, in the last months of 2010 and early 2011, foreign investors expected the dong to lose its value about 9 percent in about 6 months. However, Pressure Offshore Index showed the expected devaluation of the dong of foreign investment in the next 6 months is very low.
The government set a target to stabilise the exchange rate, in your opinion, in the short term what measures Vietnam should take and what moves are needed in the long term?
In my opinion, in the short term, Resolution 11 and the last step of the government is reasonable: dumping large amplitude (9.3 percent) to block subsequent devaluation expectations, thereby reducing storage requirements dollars. The continuous signals about keeping the exchange rate are determined, aggressive anti-inflation is also very important.
Vietnam's policies to eliminate the negative impact of capital flows remain inadequate, for example the compulsory reserve rate in Vietnam is only 3 percent compared with 19.7 percent of China, 10 percent of USA. Developments on the foreign exchange market have shown pretty positive market reactions for the government's policy.
Limiting the freedom of the black foreign exchange market, gold trading is also still needed to strengthen the power of monetary policy, but the way how to carry out effective long-term issues to be considered. If only removed by administrative measures, while the banking system does not meet the legitimate needs of people for the foreign currency, then this measure will not be sustainable.
However, it is disturbing the effectiveness of local monetary policy is not much to solve the problem of inflation. The key to long-term solution lies in fiscal policy, of which investment effectiveness needs to be put on top priority.
http://www.vietfinancenews.com/2011/05/dong-will-stabilise-in-near-future.html
In a recent interview, Dr Le Anh Tuan, research director of Dragon Capital, said that although Vietnam is still facing problems of high inflation, a number of issues on the foreign exchange market, many indicators show that most foreign investors have confidence in the stability of money into Vietnam.
More people are concerned about the dong is overvalued compared to the actual value, which causes disadvantages to international trade. What's your view on this issue?
This is a reasonable concern. However, if you use this issue to recommend the devaluation or exchange rate adjustments of dong, I think it is not reasonable. There are two problems.
First, the determination of the dong overvalued or below the real value is not easy. Economists often use real effective exchange rate (REER) to value a currency. REER of the dong means the exchange rate between dong with a basket of foreign currencies of countries with which Vietnam has trade relations, but has been adjusted for inflation of these countries. If the dong REER appreciates, the competitiveness of Vietnam's goods will be less and vice versa. However, the REER is not simple, it depends on the base year for comparison, the change of trading partners as well as inflation of these partners.
Second, the problems are related to the exchange rate in all aspects of economic life, and not only foreign trade. Dumping the dong should be very cautious because this may increase the burden on foreign-currency debt of the government and businesses, affecting the confidence of investors.
In your opinion, what level of the pressure on devaluation of Vietnam will be in 2011?
Since 2007, dong has experienced three stages of large price fluctuations. Each phase has been due to various factors "directly" leading, so the processing in each stage of course was different. In 2008, large fluctuations in the forex market were because foreign investors sold about $3 billion bonds to withdraw capital when inflation was very high. In the last months of 2009, exchange rate fluctuations were due to the too big supply of dong in the market, and smuggling activities in the gold market causing the scarcity of US dollars. This was also the year that the errors in balance of payments hit $12 billion. In the last months of 2010 and early 2011, the foreign exchange rate fluctuated in part by increased foreign currency credit in early 2010, the dong devaluation expectations, in addition to low foreign exchange reserves and high inflation.
One noticeable thing is recently despite high inflation, the dong has been continuously appreciating. This shows that in every different times, different factors will affect the exchange rate.
Looking at the balance of payments, we can easily see the amount of dollars flowing into Vietnam still larger than the outflow of dollars. However, Vietnam's foreign exchange reserves have declined continuously since 2008, this is due to errors in the balance of payments, mainly due to hoarding of dollars in the population. That problem manifested in their faith in the dong, so to handle the matter of foreign exchange, Vietnam must create people confidence in the local currency.
However, the good news is Offshore Pressure Index - the confidence index of foreign investors in dong - shows that foreign investors said that the dong will stabilise in the near future.
According to Pressure Offshore Index, in the middle of 2008, foreign investors believed that the dong would depreciate about 30 percent within 6 months. This index also showed that, in the last months of 2010 and early 2011, foreign investors expected the dong to lose its value about 9 percent in about 6 months. However, Pressure Offshore Index showed the expected devaluation of the dong of foreign investment in the next 6 months is very low.
The government set a target to stabilise the exchange rate, in your opinion, in the short term what measures Vietnam should take and what moves are needed in the long term?
In my opinion, in the short term, Resolution 11 and the last step of the government is reasonable: dumping large amplitude (9.3 percent) to block subsequent devaluation expectations, thereby reducing storage requirements dollars. The continuous signals about keeping the exchange rate are determined, aggressive anti-inflation is also very important.
Vietnam's policies to eliminate the negative impact of capital flows remain inadequate, for example the compulsory reserve rate in Vietnam is only 3 percent compared with 19.7 percent of China, 10 percent of USA. Developments on the foreign exchange market have shown pretty positive market reactions for the government's policy.
Limiting the freedom of the black foreign exchange market, gold trading is also still needed to strengthen the power of monetary policy, but the way how to carry out effective long-term issues to be considered. If only removed by administrative measures, while the banking system does not meet the legitimate needs of people for the foreign currency, then this measure will not be sustainable.
However, it is disturbing the effectiveness of local monetary policy is not much to solve the problem of inflation. The key to long-term solution lies in fiscal policy, of which investment effectiveness needs to be put on top priority.
http://www.vietfinancenews.com/2011/05/dong-will-stabilise-in-near-future.html
No comments:
Post a Comment