Foreign exchange market: bumpy ride in next few months

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Vietnam once again saw a trade deficit of $200 million in October.

Analysts can see signs of the market getting ‘choppy’ in the last months of the year. The demand for foreign currency loans has increased since the third quarter and is expected to rise further in the last months of the year, especially because the regulation on allowing export companies to borrow capital in foreign currencies will expire on December 31, 2016.

With the big gap of 3 percent between dong and dollar lending interest rates, businesses now prefer dollar loans. But they will no longer be able to borrow dollars after that day. Commercial banks’ Q3 finance reports all showed considerable increases in loans in foreign currencies compared with the second quarter after the interruption in April and May.

The foreign currency outstanding loans reported by Vietcombank, for example, increased again in the third quarter by 12.2 percent over the second quarter, much higher than the 3.4 percent increase in dong loans. The bank has seen an 8.7 percent growth rate in foreign currency lending thanks to strong growth in the third quarter.

Analysts believe that the demand for dollars will be increasing in the last months of the year as businesses need more dollars to make payment for imports. According to the General Statistics Office (GSO), after the trade surplus of $864 million in September, Vietnam once again saw a trade deficit of $200 million in October.

With commercial banks slashing dong deposit interest rates in late September and early October, and the CPI in October increasing by 4 percent compared to earlier this year, bank deposits in dong may become less attractive.

However, the State Bank, which has been keeping the dong/dollar exchange rate stable in the last 10 months, still has many tools to regulate the foreign exchange market. The dollar has increased by VND149 only in value, or 0.68 percent. In previous years, the foreign exchange market regularly fluctuated on unexpected increased demand in the last months of the year.

The limited reserve resources and the rigid forex management policy all made it difficult for the State Bank to stabilize the market. Now, with more powerful resources and a more flexible management policy, the State Bank can intervene in the market when it sees signs of problems.

Governor of the State Bank Le Minh Hung said Vietnam’s forex reserves had reached $40 billion, the highest level so far. From early this year to the end of September, the State Bank bought $11 billion.