© Reuters. FILE PHOTO: A Vietnam Dong be aware is seen on this illustration photograph Might 31, 2017. REUTERS/Thomas White/Illustration
HANOI (Reuters) – Vietnam is making ready to loosen its tight leash on the dong foreign money, together with presumably widening its buying and selling band with the U.S. greenback once more, with a purpose to preserve its shrinking foreign money reserves, a supply with direct data of the matter mentioned on Wednesday.
The dong is a managed peg to the greenback and has fallen 8% this 12 months, pressured by capital outflows because the U.S. Federal Reserve repeatedly raises charges to tame inflation.
The State Financial institution of Vietnam (SBV) has intervened to defend the foreign money, though it not often discloses FX reserves knowledge or the quantity of {dollars} spent. Some market analysts estimate about $20 billion has been offered thus far this 12 months.
When the SBV final widened the band round its day by day dong reference charge on Oct. 17 to five% from 3% — which some merchants likened to a de facto devaluation — the foreign money fell to the weak finish in an indication of the heavy demand for {dollars}.
By 0324 GMT on Wednesday, the dong was down 0.04% to 24,855 per greenback. However on the black market, it was buying and selling at a document low of 25,370 per greenback.
The supply, who refused to be recognized, mentioned the nation is keen to tolerate an extra 1-1.5% dong devaluation in opposition to the greenback by 12 months finish.
Widening the band, which might enable the market to drive the foreign money decrease with out triggering a lot FX reserves promoting, was one risk, the supply mentioned.
Different measures to cushion the dong, with out exhausting FX reserves, had been additionally being mentioned, he mentioned, with out offering additional particulars.
The timing of such strikes was nonetheless into account, he added, however would seemingly be after subsequent week’s Federal Reserve assembly the place it’s anticipate to ship one other hefty charge hike.
“The important thing measure for the SBV to stabilise the dong remains to be promoting {dollars} and shopping for dong, however the SBV just isn’t in place to do this now,” the supply mentioned.
SBV had no touch upon the doable widening of the buying and selling band, saying it might be in contact with related businesses.
Up till September, the dong was essentially the most secure foreign money within the area, with the financial system recording one other quarter of sturdy progress and stable exports offering policymakers with loads of exhausting foreign money to assist it.
However October alone noticed a 4% erosion within the dong’s worth in opposition to the greenback, underperforming its friends in Asia.
Not like its neighbours and world rising market friends, Vietnam’s central financial institution solely started to boost rates of interest in latest weeks to fight inflation. It has now raised its coverage charges twice in 4 weeks.
“Vietnam’s response to the worldwide scenario has not been so immediate. That is why the dong is below a lot strain,” the supply mentioned.
The supply mentioned the SBV was attempting to preserve its {dollars} because the nation’s FX reserves had sunk to the Worldwide Financial Fund’s really helpful degree, which is at the least three months of imports.
Vietnam’s international reserves have fallen considerably because the begin of the 12 months, from the height of $112.2 billion in January to $94.5 billion in August, based on a Fitch Options report citing IMF knowledge.
Round $2 billion of international funding inflows within the type of present mortgage contracts are anticipated subsequent month, which may cut back the strain on the foreign money.
“We imagine that additional coverage tightening might be required to stabilise the scenario,” mentioned Financial institution of America (NYSE:) Securities’ ASEAN economist Mohamed Faiz Nagutha in a be aware to purchasers on Tuesday.
“It will seemingly take the type of one other de-facto devaluation of the dong … and/or additional charge hikes,” he mentioned.
“We preserve our medium-term optimistic view on Vietnam, however policymakers want to attract vital classes from the present episode to modernise the financial coverage regime and make means for a extra versatile alternate charge to behave as a shock absorber.”
