According to an Eximbank source, the State Bank had recently sped up the selling of dollars to lenders. “They have provided dollar amounts that we have needed for the past few weeks. Of course, we had to filter ourselves when selling dollars to enterprises. Only buying dollars for importing prioritised items such as pharmaceuticals or fertilisers was accepted,” said the source.

In July, State Bank governor Nguyen Van Giau reconfirmed that the authorities “had no plans to further devalue the local currency”. At the same time, the State Bank promised increased volumes of dollar sales to the banking sector. It also revealed that dollar deposits in the banking system totalled $20 billion, lower than national foreign currency reserves.

Duong Thu Huong, general secretary of Vietnam Banking Association (VNBA), said those moves had allayed local enterprises’ concerns. “The most important thing is confidence in the local currency. That’s what the authority has regained from the market participants,” said Huong.

Truong Hoang Luong, general director of Kien Long Bank, said confidence in the local currency had encouraged enterprises to come back to dollar borrowing, which had stalled in the first half of the year.
“Dollar loan extensions have been increasing over the past few weeks,” said Luong.

In the first half of 2009, with the exchange rate fluctuating widely, local enterprises turned their backs on borrowing dollars, with concerns of possible exchange rate risks. For instance, in March, if an enterprise borrowed a $10,000, three-month loan when the exchange rate was VND17,500, then in June, when the exchange rate increased to VND17,800, it would mean the enterprise had to bear an extra VND300 cost for each dollar borrowed.

According to Tai Hui, Standard Chartered’s South East Asia regional head of research, the devaluation risks for Vietnamese dong had decreased. “In recent months, the government and the State Bank have repeatedly stated that they will not devalue the currency again. Given that the trade balance deficit has narrowed somewhat and that the economy is picking up, we believe the risk of further one-off devaluations has decreased,” said Hui.

Since March 2008, the State Bank has conducted a series of one-off devaluations and it has widened the daily trading band on several occasions. Currently, the exchange rate’s daily trading band is +/-5 per cent, which means that local banks are allowed to trade the greenback at 5 per cent either side of the State Bank’s reference exchange rate, which is set daily.

Meanwhile, the Vietnamese government expects the trade deficit to narrow to $10 billion in 2009 from $18 billion in 2008. Standard Chartered forecasted that with the global recession, Vietnam’s foreign direct investments and inward remittances would drop to $8 billion and $6 billion, respectively, from $11.5 billion and $7.2 billion in 2008.