Forex

II. Financial risks
II.1. Limited transactions with monetary control policies
Foreign currency is regulated by laws including Ordinance No. 28/2008/PL-UBTVQH11
Dated December 13th, 2005 and Decree 160/2006/NĐ-CP dated December 28, 2006. These regulations can be summarized by “easier in than out”. Foreign entities are encouraged to put foreign currency in for direct investment through a bank account opened with a financial institution based in Vietnam. For indirect investment, foreign currency has to be sold and a VND bank account shall be used for transactions. Although the laws do not limit the right to transfer foreign currency out of the country, there are quite complicated and time consuming procedures for doing that. Transaction papers including contract, invoice, shipping documents and customs declaration have to be proved to banks for transfer of foreign currency overseas. In line with its commitment to WTO, Vietnam government does not limit earnings to be converted to foreign currency and sent home. There are no longer forced sales of foreign currency earned through exports and tax over earnings sent home. However with the government control and due to some characteristics of the monetary market, it’s not always possible to buy foreign currency for business activities and earnings repatriation. In case of US dollar, there has been a “fight” among companies to purchase it from the banks at their official rates. Export companies and local people prefer to hoard US dollar because of low public confidence on the Vietnam dong. This has created shortage of US dollar in the market. Banks have to purchase US dollar with high rates (which are higher than the official rates regulated by laws) by different unofficial ways. Therefore banks have to sell their UD dollar with “unofficial rates” which are obviously should be high. The higher you pay to the banks the more US dollar you can get. This forces foreign invested companies, when need to bring US dollar home, to purchase US dollar always in the short condition of quite “unhealthy” monetary market. There were even forced sales of US dollar from some State owned companies early 2009 to ease the serious shortage of this currency. This reflects a weak liquidity condition of the foreign exchange market. Also the systems allows priority for importation companies, which may result in less chances for foreign invested companies to convert their profits to US dollar.

II.2. Foreign exchange rate
We are analyzing the exchange rate of Vietnam dong against one US dollar which is the most available foreign currency in Vietnam.
· How it is determined
The spot rate is determined by an average interbank rate officially announced by the State Bank of Vietnam (“SBV”) and a regulated band which varies from time to time. Vietnam government policy has been always to stabilize the exchange rate VND/USD. This preference makes the market movements sometimes seized. The determination process of average interbank rate is not transparent enough to give foreign investors a forecast. It sometimes moves slowly or even does not move although the commercial banks quote their rates at the upper bound of the band. Also the band is a short term device of intervention to slow down the exchange rate changes. As the result of these, the official rates sometimes do not properly reflect the market demand and supply. This in turn results in the development of the “black” (ad hoc) market where the demand and supply can meet. Vietnam government usually makes some statements with the purpose of assurance the stability. However they are obviously not able to resist from the market movements in a long run. So soon enough after these statements, the exchange rate VND/USD goes up or down rapidly because of the market pressure. At a seminar July 22, 2010 Le Duc Thuy, Chairman of Supervision Board of the National Finance (used to be Director of SBV) stated that there would not be a big change of VND/USD exchange rate until end of the year. The exchange last week of July at black market went up from day to day, reaching the hottest rate of 19,300 VND/USD on July 30. The market reacts to the increasing ask price announced by the commercial banks and narrowed spread, which is only 5-6 VND these days.
· Black market
The above regime leads to quite a powerful black market in Vietnam. The regime stabilizes the exchange rate but VND is not stable. It has been under the pressure of depreciation for the past years. It has been depreciated by 35% since 2000 (19,100 in 2010 compared to 14,000 in 2000). Public confidence on VDN thus is low, leading to a trend of USD hoarding. It’s calculated by an economic expert Le Dang Doanh that people in Vietnam have not less than 30 billion USD in hands. The more VND is depreciated, the more USD people want to keep, which in turns makes depreciation worse. This is quite a destructive element for the economy.
· National USD reserve
National USD reserve is one of the factors impacting VND/USD exchange. A report issue by Citigroup June this year estimates that Vietnam foreign exchange reserves stays at US$13 billion based on 7 weeks of imports of goods and services. Also they think that Vietnam lost over a third of its foreign exchange reserves in 2009 (to US$15 billion from US$23 billion end 2008). This would prompt again devaluation of VND.
· Export-focused economy
Vietnam is still adhering to an export-focused growth. Trade deficit of seven months of 2010 is about US$7 billion (export US$ 38 billion and imports US$45 billion). Due to the tightened monetary policies, export manufacturers have been facing increasing costs of credit. They have been also struggling to find labor for their manufactures which are mostly labor intensive. Just before the Communist Party of Vietnam 11th National Congress policy makers, with the pressure of economic growth, may hold off from tightening the monetary conditions further. Also, they may rely on devaluation of VND to support export sector and control the trade deficit.