[Vnbiz] Vietnam's position on economic issues

[Tran Dinh Hoanh]

Dear Brothers Nam, Shane & Craig & CACC,

Anh Craig, thanks for the notes about pricing.  Those help.

Anh Shane, good to hear land price is down and you are taking the
opportunity.  I think buying land now is wise.

Now to anh Nam's questions:

1.  I said the SBV should have a good grip on USD circulation because USD
has such a strong influence on Vietnam's economy.   That is a very general
statement.  It means the SBV should have a fairly good idea of how much USD
is circulating in Vietnam (at least through the official channels), where
and how much USD gathers at each location in the economy (like in the SBV
itself, in commercial banks, in exchange agencies, and how they are kept in
the accounting books in various accounts, etc...).

Now about controlling inflation.  First of all, we need to keep in mind that
economics is still more of an art than a science.  So, there are many things
to do to control inflation, and economists may argue and disagree all the
time about what to do.

Typically, when there is inflation, it usually means there is too much money
(both USD and VND, but mostly VND) in the economy, much more than available
products and services for sale.  Demand (from VND) is higher than supply (of
products and services), therefore the price is increasing.  And price
increase means inflation.

So most economists automatically recommend increasing the interest rate when
there is inflation.  High interest rate will do 2 things: First, it
discourages people from borrowing money, and second, it encourages people
from saving money in the bank.  These two effects will reduce the volume of
money circulation in the economy.  Less money for the same volume of
products and services means less demand for the same supply, therefore price
is reduced, meaning less inflation.

That is about interest.  We talk mainly about VND here.  But the same logic
works with the USD too. So the banks also increase the interest rate on USD
saving.

Now, SBV also tries to use the exchange rate to keep the VND high to fight
inflation.  Here is how it works.  Say, you import a sewing machine at 50
USD.  If the exchange rate is 15,000 VND to a USD, then that machine costs
750,000 VND.  However, if the VND dong is weaker so that 1USD equals 18,000
VND, then that machine costs 900,000 VND.  So the SBV thinks that if it
keeps the USD low and VND high (by sticking with the exchange rate of
 15,000 VND for 1 USD), then it can keep import costs low, therefore helps
keep the general prices in the economy low.  This is the direct effect of
exchange rate.  (We can have other kinds of example too.  But one is enough
to demonstrate the argument).

In addition to the direct effect, we also have the indirect psychological
effect.  If the VND is kept high against the USD via exchange rate,
people tend to have more faith in the VND and therefore will not be so panic
to make inflation worse (Ex:  if people panic, they will just line up to buy
gold or USD and will not put VND in the bank.  That will increase prices of
USD and gold, and may also increase the prices of all other things in the
economy -- psychology, if USD and gold prices are high, everything else will
be high along).

Now, I am generally against this kind of strategy, because it encourages
import and discourage export.   (A Viet Tien shirt costs 180,000 VND
will export for 10 USD if the exchange rate is 1USD/18,000VND, but will be
up to 13 USD if the exchange rate is 1USD/15,000 VND).  Now, if you run
a private company, you will realize that only governments can do and would
do crazy thing like this.  If you are a company, when there is any kind of
trouble, you immediately cut spending and increase selling.  That is always
the fundamental strategy.

So the best strategy is to allow the free exchange rate to work.  That rates
will help export (selling) and discourage import (buying).  It will help
strengthen the economy.  If our export and production are increased and
import decreased, that will eventually beat down inflation.  This is just
common sense.

We should not encourage spending (import) and discourage selling (export),
because such a strategy will weaken our economy further.

Besides, such as strategy won't help inflation control because there is
always a black market (or free market) that will reflect the true strength
of the VND in everything in the economy (except probably in import and
export).

In addition,  the USD may just find its way to stay in the free market
instead of going back to the SBV at low value.

Further, if the official exchange rate is so much different from the free
rate, we may face the danger of a currency crash eventually.

2.  Now exchange rates: I am aware of only 2 exchange rates: One is in the
free market rate and one official rate set by SBV.  I think the official
rate is the rate that everyone is supposed to use every where (but of
course, other than commercial banks, people don't care about that and just
use the free rate in the free market, even if it means they have to do it
under the table.  I suspect that some commercial banks will try to use the
market rate under the table whenever they can).  (Anyone has different
information about this, I would love to learn).

Brother Nam may think about interest rates.  For interest, the SBV sets the
"prime rate" which is the rate that SBV charges commercial banks.  And the
commercial banks may have a rate slightly higher than the prime rate for
interbank lending, and even a higher rate charged in loans to consumers.

Back to exchange rates, the official rate does have some effects. Ex:  if
you do import, you may want to go to commercial banks, do paperwork, and get
the official rates.  Better for you.  (But bad for the economy).

3.  About the increase in interest rate, I have answered in section 1 above.

4.  I think the SBV is telling commercial banks to sell USD to people who
can prove that they need USD (mostly importers, and may be some exporters
occasionally, depending on exactly what they do).  Individuals can hardly
prove they need USD.  The reason SBV has to do that because everyone the
country will want to buy USD at commercial banks at official rate and resell
them in the free market at the free rate, and make 10% profit immediately.
(Easy money!)

5.  Of course, the economy is in trouble and we should be concerned about
it.  But, as in any kind of crisis, if we keep our hearts and our minds
together, we will come out of it victoriously.  The bottom line is just
that:  United we stand, divided we fall.

Very good questions, brother Nam.  Thanks for asking.

Have a greatr day!

Hoanh
On Mon, Jun 9, 2008 at 1:23 PM, Mercedes Benz <myhometheatre at gmail.com>
wrote:

> [ Vietnam Business Forum ]
>
>
> Dear Brother Hoang and CACC,
>
> I like to share with you all my little knowledge and questions about the
> currency-related issues.
> 1. The grip on USD ex-rate by SBV is for reducing the current inflation
> (said by Bro. Hoanh). I do not understand this much.
>
> 2. There are currently 3 existing exchange rate USD/VND.
> a) Official rate by SBV.
> b) Inter-bank rate.
> c) Free-market rate.
> It is the fact that the official rate almost make no sense. (Am I right?).
> That is because all of trading is based on the 2 others. Inter-bank rate are
> usually applied on banks and enterprises. By one way or the other, the
> actual rate will reflect the real demands and supplies.
>
> Free-market rate is most relevant to individuals, the rich and some small
> companies for any purposes ranging: investment, speculation, asset stocking
> due to herd mentality, bypassing some systems, realizing their illegal
> revenues and so on.
>
> 3. Currently, interest rates offered by commercial banks already exceed
> 16%. (2% left for moving) What is the meaning behind the scence?
> Is this for reducing inflation (retrieve more and more VND)?
> Why the interest rates in USD are also increased to 8% at the same time?
>
> 4. SBV already issued a decision about forbidding commercial bank agencies
> to sell foreign currency to individual but commercial banks only. How long
> will it stay effective?
> Consequently, citizens will be in favor of gold stocking. The prices go up
> accordingly. Can it be also prohibited?
> Is the symptom related to the stock market situation?
>
> 5. I share my feeling: I am really worried about our Vietnam!
>
> Could you CACC please help me make the above concerns clearer?
> Thank you much!
> E. Nam
>
> --
> Tran Dinh Hoanh, Esq., LLB, JD
> Washington DC
-------------- next part --------------
An HTML attachment was scrubbed...
URL: http://mail.saigon.com/pipermail/vnbiz/attachments/20080609/7d0d3fa8/attachment.html