Experts believe central bank has acted sensibly given regional and global circumstances.
The State Bank of Vietnam (SBV) increased the exchange rate band from +/-2 per cent to +/- 3 per cent on August 19 and the average interbank VND/USD exchange rate from VND21,673 to VND21,890. The ceiling rate and floor rate are now VND22,547 and VND21,233. This was the second adjustment to the bank within a week. The SBV explained there is now enough room for the VND to be flexible by the end of 2015 and even the beginning of 2016, despite adverse changes in the domestic and global market.
Many domestic and international organizations have commented on the move. Experts at ANZ Bank said they knew an adjustment was coming but it was bigger than they anticipated. They appreciated the positive move in addressing the recent devaluations of the Chinese Renminbi, and that Vietnam had adapted better than other emerging markets.
The changes to the exchange rate band and the interbank exchange rate will ease the burden on the SBV using foreign exchange reserves to intervene in the currency market and will put the currency in a better position should the US Fed increase interest rates in September, as expected.
CEO of HSBC Pham Hong Hai said the SBV has created sufficient space for supply to meet demand. The adjustment shows it foresaw supply and demand in the market and, like ANZ, he believes it eases the burden on selling foreign exchange reserves.
Experts at the BaoViet Securities Joint Stock Company (BVSC), meanwhile, view the move as being a drastic action and that it breaks the central bank's commitment to not devalue the VND by more than 2 per cent, but recognizes that it was being flexible in adapting to changes in the market.
Exports have price advantage
BVSC also said that compared with other countries in the region the devaluation of the VND is at a medium level. Vietnam's exports to the EU and the US will not be overly affected compared with its competitors in the region, thanks to the flexible and timely adjustment made by the SBV.
Vietnam still depends on raw material inputs from China, it went on, and with the current economic structure this dependence will remain. Due to the devaluation of the Renminbi imports from China are unlikely to be cheaper. The BVSC experts also believe the "twin" adjustments by the SBV will not have any significant impact on the trade deficit over the remainder of the year.
Mr. Hai from HSBC, meanwhile, said that the exchange rate adjustment will have an impact on businesses that continue to import machinery and raw materials from China.
In exports, however, Vietnam will have a comparative advantage in price. It must still compete with China, in commodities and export markets, so any benefit from the exchange rate adjustment will not last long. In order to create an advantage, he said, Vietnamese businesses have to invest in guaranteeing quality.
He also said that businesses should not buy goods by any means because this adds to the existing volatility. "My advice is that enterprises should actively take measures in risk management rather than just rely on some form of protection coming from the SBV," he said. "After the market returns to stability, businesses should apply risk management to avoid any unforeseen volatility in the future."
"The widening of the Dong trading band provides an enhanced buffer against external shocks, and provides more scope for Vietnam to have an independent monetary policy, and thus will help the authorities achieve their broader goal of maintaining overall macroeconomic and inflation stability. Enhanced two-way flexibility is also important to facilitate fundamental changes in Vietnam’s economy, such as in response to new trade arrangements and other structural reforms.”
Mr. Jonathan Dunn, IMF Representative for Vietnam/Lao.