Vietnam Shouldn't Waste Cash Ending Twin Rate, World Bank Says

By Patricia Lui

July 2 (Bloomberg) -- Vietnam's central bank shouldn't use up its supply of dollars with intervention because the black market rate for the dong won't converge with the official one until the currency trades freely, a World Bank economist said.

The exchange rate offered by illicit traders in Hanoi fell to as low as 10 percent below the rate allowed by the central bank last month on concerns that an overheating economy and the widening trade deficit will trigger a currency crisis, Noritaka Akamatsu, a Hanoi-based economist for the World Bank said in an interview. The central bank allows the dong to trade up to 2 percent on either side of a reference rate it sets daily.

The State Bank of Vietnam should not exhaust its currency reserves of $22 billion by intervening in the market and selling dollars indiscriminately, said Akamatsu, who is the World Bank's regional advisor for capital market development for East Asia and the Pacific region. Vietnamese people are seeking dollars to invest overseas and to hedge against inflation, he said.

``The black market and the official rates will never fully converge unless the dong is floated,'' he said. ``The central bank has been supplying dollars but only to the targeted market of importers and exporters. It shouldn't go beyond that as it could result in a flight of dollars if they supply too much.''

The dong gained as much as 0.1 percent to 16,824.5 a dollar before trading at 16,846.50 as of 10:24 a.m. in Hanoi, versus 16,844.50 yesterday, according to data compiled by Bloomberg. It fell 1.35 percent last week after the central bank widened the official trading band from 1 percent on June 27. The State Bank of Vietnam fixed the daily reference rate at 16,519 a dollar, compared with 16,517 yesterday, according to its Web site.

The black market rate for the dong rose to as high as 19,500 last month, Akamatsu said. It has since recovered to 18,000 after last week's band widening, he said. That is 7 percent weaker than the reference rate.

Currency Reserves

Vietnam isn't facing a similar predicament to Thailand during the Asian financial crisis because investment by short- term portfolio funds is limited and most cash is ``in closed-end funds which don't liquidate quickly,'' he said. Closed-end funds are publicly traded and investors withdraw cash by selling their shares rather than through redemptions.

``What they did with the expanded trading band and a slight depreciation in the reference rate is good as the dong is now at a more realistic rate,'' he said. ``Right now, there could be some pressure on the dong and a shortage of dollars but it is managing O.K.''

Vietnam's economy expanded 6.5 percent in the first half, the slowest pace in at least seven years, as slumps in the stock and property markets prompted builders to halt projects. The inflation rate reached 26.8 percent in June, prompting the government to curb lending.

The outlook on the dong will depend on inflation in the coming months, Akamatsu said, adding that ``the government's policy is working but it remains to be seen how effectively.''