Exclusive-Vietnam may increase dong trading band to preserve FX reserves

© Stocksak. FILE PHOTO – A Vietnam Dong note can be seen in this illustration photo, May 31, 2017. REUTERS/Thomas White/Illustration

HANOI (Stocksak), – Vietnam is looking to loosen its grip on the dong currency and possibly increase its trading band with U.S. dollars again in order to preserve its shrinking currency reserves. A source with direct knowledge of this matter stated Wednesday.

The dong, which is a managed peg to USD, has fallen 8% in the past year. This was due to capital outflows as U.S. Federal Reserve raises rates to manage inflation.

Although the State Bank of Vietnam has intervened to protect the currency, it doesn’t often disclose FX reserves data nor the amount of dollars expended. According to market analysts, this year’s total sales have reached around $20 billion.

The currency was weakened by the heavy demand for dollars after the SBV last increased the band surrounding its daily dong rate reference rate on Oct. 17. It was 5% instead of 3%.

The dong had fallen 0.04% to $24,855 per dollar by Wednesday’s 0324 GMT. On the black market, however, it was trading at a record low 25,370 per dollar.

According to a source, the country is prepared to accept a further 1-1.5% devaluation of the dollar against the dong by year’s end.

According to a source, a possible option was to increase the band. This would allow the market drive the currency lower without selling FX reserves.

He said that other measures were being considered to cushion the dong without exhausting FX reserves.

He said that although the timing of such moves was still being considered, it would likely be after next week’s Federal Reserve meeting, where it is expected to deliver another substantial rate hike.

According to the source, “The key measure for SBV to stabilize the dong is still selling dollars to buy dong, but the SBV does not have the resources to do that right now.”

SBV declined to comment on the possibility of widening the trading band and said it would be in touch directly with relevant agencies.

The dong was the most stable currency of the region up to September. With strong growth in the quarter and solid exports, the economy provided policymakers with plenty hard currency to support it.

October saw a 4% decline in the value of the dong against the dollar, which was below its peers in Asia.

Vietnam’s central banks have only recently begun to raise interest rates to combat inflation. This is in contrast to its neighbours and global emerging markets peers. It has now raised its policy rate twice in the space of four weeks.

“Vietnam has not responded quickly to the global situation.” According to the source, this is why the dong feels so pressure.

According to the source, SBV was trying not to spend its dollars since the country’s FX reserves have fallen to the International Monetary Fund recommendation level. This is minimum three months of imports.

According to Fitch Solutions, Vietnam’s foreign reserves dropped significantly from $112.2 billion in January, to $94.5 billion in August. This is based on data from the IMF.

The expected inflow of around $2 billion of foreign investment through existing loan contracts is expected next month. This could help to reduce the pressure on currency.

“We believe that further policy tightening is necessary to stabilize the situation,” stated Bank of America Securities’ ASEAN economist Mohamed Faiz Nagutha, in a note to clients Tuesday.

He stated that this would likely be a de facto devaluation of dong… and/or rate hikes.

“We remain positive on Vietnam’s medium-term future, but policymakers should learn from the current episode to modernize the monetary policies regime and allow for a more flexible currency rate to absorb shocks.

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Stocksak Editorial

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