Getting dong for dollars is tricky in Vietnam

http://www.iht.com/articles/2008/02/28/business/dong.php

HANOI: Instead of heading to the bank to change U.S. dollars into Vietnamese dong, a travel agent searches for another businessman to act as his counterparty.

Shortages of the dong are causing ripples through Vietnam’s banking system, businesses and the country’s fledgling stock markets after measures by the central bank to dry up liquidity to fight double-digit inflation.

The tightening means that banks are trying to preserve their dong holdings, forcing many businesses to operate outside of the banking system when they want to change dollars for dong.

“We have to find a business who wants to buy the dollar for their payment needs if we want to convert our dollars into the dong and sometimes that can be difficult and more costly,” said the owner of a travel agency that handles international tours and has an account at a major state-run bank. The business person spoke only on condition of anonymity.

Many local and foreign bankers, traders and businessmen declined to be identified with their comments on the liquidity crunch because of the sensitivity of the issue in one-party Communist-ruled Vietnam.

On Hanoi’s unofficial foreign exchange trading street, Ha Trung, business is brisk at a congested strip of shops where the dollar and fat stacks of dong change hands over the counter.

One dollar buys 15,800 dong on the black market, compared with the central bank’s published rate of 16,054 dong.

Several banks in Hanoi said this week they would not buy dollars from nonclients. Only about 10 percent of the country’s 85 million people have bank accounts in what has largely been a cash economy even with market reforms.

Officials at the State Bank of Vietnam in charge of foreign exchange and banking transactions declined requests for comment on policies or the liquidity crunch, which peaked this month around the Lunar New Year festival, or Tet, when cash demand was highest.

In one tightening measure, the central bank said it would oblige commercial banks to buy 20.3 trillion dong, or $1.26 billion, of treasury notes. That will squeeze more dong from the banks.

The news last week sent the Ho Chi Minh Stock Exchange down 16 percent after panicked selling by local retail investors who dominate the small $20 billion market.

The scramble to secure dong deposits prompted banks to raise interest rates on savings. Depositors chasing high interest rates have withdrawn 20 trillion dong from two state-run banks in recent days, the central bank said.

Overnight loans, primarily used by banks to make sure they have sufficient funds to balance their books, have climbed as high as 40 percent in the interbank market in February.

Short-term interest rates have also been volatile, shooting up to 15 percent last week before coming down this week to 10 percent.

The central bank stepped in Wednesday to try to stabilize the market by ordering banks to cap the rates on dong deposits at 12 percent.

Vietnamese rice traders also described their difficulty getting dong for dollars. Vietnam is the world’s second-largest rice exporter after Thailand.

After loans jumped 37.8 percent last year, some central bank money supply tightening measures coincided with high demand at Tet, presenting commercial banks with a situation they had never faced in the underdeveloped financial system, foreign bankers said.

Annual gross domestic product growth of around 8 percent, foreign direct investment pledges of $20 billion and record overseas development aid of $5.5 billion should keep Vietnam’s ambitious economic development ticking along, economists said.

The Asian Development Bank and a number of economists say the international financial crisis and a slowdown in the U.S. economy would have an impact on growth. Vietnam has a large trade exposure to the United States.

Vietnam’s inflation is at decade highs and money markets are extremely volatile, but the bigger worry for economists is that the central bank is inexperienced and ill-equipped to deal with the pressures of moving to a market economy.

“They are struggling with issues that are kind of new for them and, on the face of it, they are behind the curve,” said Tim Condon, an economist at ING.

“So, they have to do everything they have done and more. Broad-based tightening has to be done very quickly to prevent inflation from doubling again in the next half year and all forms of liquidity absorption need to be brought to bear,” Condon said.

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