Exchange rate maintains stability despite volatility

16:40 | 31/01/2017 Finance - Banking

(VEN) - The exchange rate of the Vietnamese dong was maintained at a stable level in 2016, significantly contributing to achieving the country’s macroeconomic targets.  

exchange rate maintains stability despite volatility

Despite fluctuations in the exchange rate between the US dollar and the Vietnamese dong, the situation remained under control in 2016

Daily central rate

The past year saw the application of the daily central exchange rate by the State Bank of Vietnam (SBV). The central rate is calculated on the basis of a weighted average of Vietnamese dong prices in the interbank market against the prices of major foreign currencies. The new method has proven its efficiency, as reflected in developments in domestic and foreign markets. The exchange market witnessed several waves of price increases in foreign currencies. In particular, the US dollar occasionally increased to VND23,000 on the Vietnamese black market. The SBV set the reference VND/USD exchange rate at VND22,112 per dollar on November 15, an increase of one percent compared to the beginning of 2016. However, this figure continued to be adjusted with the reference exchange rate for VND/USD set at VND22,125 per dollar on December 12.

According to experts, the volatility of the foreign exchange market during the past year was due to objective reasons. Nearly a month after Donald Trump was voted the 45th president of the United States, the US dollar value has increased by 3.4 percent, forcing other countries to revise their policies.

In Vietnam, too, the exchange rate management relies on such developments in the global financial markets and reacts in a flexible manner. The adjustments to the reference VND/USD exchange rate by the SBV contributed to ensuring the balance of foreign currency supply to meet demand and the interests of both importers and exporters.

SBV Deputy Governor Nguyen Thi Hong said that the rapid increase in the reference VND/USD exchange rate was due to psychological factors. Foreign currency supplies in 2016 came from export activities, remittances and FDI disbursement, while demand saw no great pressure. Therefore, although exchange rate between the US dollar and the Vietnamese dong saw changes, the situation remained under control.

Economist Can Van Luc said that compared to the beginning of 2016, the Vietnamese dong depreciated by more than one percent during the year. However it was in accordance with developments on the world market.

Ensuring stability

The flexibility of the foreign exchange market is based on Vietnam’s strength in foreign exchange reserves, balance of trade and FDI attraction.

By November 2016, the country’s foreign exchange reserves had reached a record of over US$41 billion, while foreign currency supply and demand remained balanced. The record reserve was the result of a growth in FDI inflows into Vietnam and of remittances from Vietnamese living abroad, which are estimated to have reached US$14 billion for 2016. The SBV also purchased US$11 billion worth of foreign currency toward the end of November 2016.

The SBV continues to allow credit institutions to provide foreign currency loans following Circular 24 until the end of 2017, contributing to the stability of businesses in need of foreign currencies.

Economist Can Van Luc said that foreign currency loans are necessary to meet legitimate business demands. The exchange rate is forecast to face many fluctuations in 2017 and will likely require significant adjustment. With the application of the daily central exchange rate, Can Van Luc forecasts that the exchange rate fluctuations will range between one and three percent.

However, according to a report by a financial analysis group led by Dr. Dinh The Hien, the 2017 exchange rate will come under pressure and could increase as much as five percent because of higher domestic demand for foreign currencies, the power of the US dollar and the Federal Reserve’s increase of its benchmark interest rate.

The SBV has pledged to closely monitor macroeconomic developments and actively implement measures and tools to maintain stability of the foreign exchange market.

In addition to supporting efforts to stabilize the foreign exchange market in 2017, the SBV will try to increase the country’s

foreign reserves in accordance with actual conditions and to ensure inflation control.

Duy Minh