Mr. Truong Van Phuoc, Vice Chairman of the National Financial Supervisory Commission, spoke with VET about the central bank's recent moves in the exchange rate and Vietnam's exchange rate regime.
At the beginning of the year the State Bank of Vietnam (SBV) set a target of controlling the foreign exchange rate at around 2 per cent but it’s gone beyond that. What are your thoughts?
Policymakers always want to intervene in the market to exert some control, via two ways.
The first is intervention in supply and demand in the market by selling foreign currencies, which makes supply exceed demand and lowers the exchange rate, or by buying VND to make demand higher than supply to increase the exchange rate.
The second is intervening by sending a message to the market, as SBV did at the beginning of year, that it has set a target of managing the foreign exchange rate at 2 per cent.
Regarding managing the exchange rate to adapt to international movements, if the US Fed increases interest rates the USD will become stronger and the Chinese Yuan has already been devalued. These factors will see Vietnam’s trade deficit with China become significantly larger and make it hard for SBV to meet the target it set at the beginning of the year.
Therefore, if the SBV was to keep their word it would have an impact on the economy. Exports would benefit but State reserves would be less.
Why didn’t the SBV widen the exchange rate band to +/- 5 per cent or more while also managing the interbank average exchange rate, as a means of keeping its word?
The SBV has recently used many technical methods in both managing the exchange rate band and increasing it from 2 per cent to 3 per cent to open up more space for trading.
It would be simple for the SBV Governor to keep the interbank average exchange rate and widen the band to +/-5 per cent or +/- 10 per cent and say “I am making the market flexible.” But if the SBV did this it would be bad for the market. I think the SBV has been quite brave.
Why are no other instruments used to reduce the exchange rate risk, with only the management of the SBV being relied on?
The movement of the Yuan is not a single act and needs to be placed in the context of China’s stock market losing 30 per cent and trillions of Yuan disappearing as a result, its exports being in a deadlock, and it recording slower economic growth, which forced their hand. The adjustment by the SBV can be viewed as a necessary self-defense. It’s like evacuating your house because your neighbor’s house in on fire.
It also needs to be emphasized that a modern financial market must face up to complex situations. Making use of the derivatives instruments to reduce risk from external movements may influence the market. Objective risk is still unpredictable.
There have been suggestions recently that the SBV should change the regime from pegging the exchange rate to floating the exchange rate. What do you think about this?
There is no need to rush into anything. It is a serious and complex matter. Theories are discussed at conferences and forums, and this matter relates to many factors in the economy.
For example, China wants the Yuan to become one of the fives currencies in the basket of key international currencies but are yet to achieve this goal. China has to free the balance of capital but is unwilling to do so. State foreign reserves in China were $4 trillion, which have now fallen to $3.6 trillion, and they still won’t float their currency.
Fifteen years ago the SBV researched the matter and realized it needed to prepare a detailed blueprint in order to make the move. It doesn’t just rely on the SBV acting but also on other sectors in the economy. The SBV can’t act alone.
It would require handling hundreds of other matters, to build a strong platform for the exchange rate.
To choose an exchange rate regime suitable with an economy like Vietnam’s is not easy. Changing from one exchange rate regime to another cannot be done lightly, even if it represents a finishing point Vietnam must reach.