Saturday, October 06, 2007

Vietnam's foreign currency scarcity may affect foreign capital inflow

16:36' 05/10/2007 (GMT+7)

VietNamNet Bridge – Recently, experts have been talking much about the shortage of foreign currencies in the market, which they believe will badly affect the foreign capital inflow into the stock market.

In its fifth report on Vietnam’s economy, the Hong Kong and Shanghai Banking Corporation HSBC said that the foreign currency shortage was caused by the fact that the central bank did not sell foreign currencies to satisfy the demand. It is estimated that the central bank has purchased $7bil so far this year.

Richard Yetsenga, expert on foreign currencies under HSBC, in charge of Asia, said that the foreign currency shortage might worry foreign investors if they wanted to transfer capital abroad and they could not buy foreign currencies from banks.

Under Decree 160 guiding the implementation of the Forex Management Ordinance, all investment deals in Vietnam’s stock market must be carried out in VND. Foreign investors who have foreign currencies must convert their money into VND to be used in transactions. The investors have the right to buy foreign currencies from banks when they need to transfer profit abroad.

The shortage of foreign currencies, which may hinder the transfer of foreign investors’ profit abroad, is considered a risk for foreign investors, said Mr Yetsenga, adding that because Vietnam was an emerging market it was possible that foreign investors might turn their backs on the market because of the said risk.

Nevertheless, an official from the State Bank of Vietnam said that there was no need to worry about this. He said that no foreign investor had complained about difficulties in transferring capital abroad. With the current big foreign currency reserve, the central bank can intervene in the market when necessary, while commercial banks are always asked to sell foreign currencies to meet the legal requirements of clients. If the foreign currency position of banks falls to below 5%, they can ask the central bank to sell foreign currencies.

According to Dominic Scriven, Managing Director of Dragon Capital, the foreign currency shortage recently only affected a small number of foreign investors who plan to begin investment in Vietnam.

The current policy on forex management has been applied in Vietnam for many years, and foreign investors should learn about this before deciding to make investment in Vietnam, Mr Scriven said, adding that it was understandable why the current policy needed to be applied.

Vietnam has been trying to keep the VND value a bit weak against the dollar so as to encourage exports, and the central bank’s move to purchase dollars several months ago was also an effort by the central bank to stabilise the exchange rate.

Mr Yetsenga said that when integrating more deeply into the world, Vietnam needed a more suitable forex management policy. Vietnam still can follow the policy on stabilising the exchange rate, but needs to be more flexible when dealing with the cash inflow and outflow, which means the purchasing and sale of foreign currencies should be timely.

Regarding loans in foreign currencies, Vietnamese enterprises still prefer borrowing in foreign currencies to VND, as foreign currency loans always have lower interest rates (4-5% per annum compared to 12-13%).