Vietnam greedy for too many different goals in setting up monetary policy

The Vietnamese monetary policy always aims at many different targets, which, in some cases, are contradictory. As a result, the policy cannot bring the desired effects. (VIETNAMNET)

Simplifying the monetary policy’s targets

The experts from the International Monetary Fund (IMF), who have been keeping a close watch over the Vietnamese monetary policy over the last many years, have commented that Vietnam always pursues too many goals with its monetary policy, from the economic growth, exchange rate stabilization and inflation congestion. Meanwhile, these are the contradictory things which should be approached through different ways.

The loosened monetary policy, for example, which expands credit rapidly, would help stimulate the national economy, but it would also cause a side effect– the high inflation.

Therefore, the IMF’s experts believe that it would be better to simplify the monetary policy’s targets. The State Bank, for example, has recently targeted a reasonable goal of controlling the inflation. The low inflation rates would help stabilize the national economy, thus bringing benefits to businesses.

A reasonable monetary policy would help create a good business environment in which the market performance is predictable for businesses. This would create favorable conditions for businesses to draw up their business plan, including the investment capital arrangement and labor recruitment.

Meanwhile, the low inflation would also benefit the poor and the old people who live on the stable and limited incomes.

 

IMF has also suggested that the dong/dollar exchange rate needs to be regulated in a reasonable way, to serve the economy which has been more deeply integrating into the world and has been heavily relying on foreign investment.

The State Bank of Vietnam has been advised to gradually remove the non-market measures to control the market, including the ceiling interest rate and targeted growth.

 The side effects of the monetary policy loosening warned

The government and the State Bank of Vietnam have been advised to maintain and to pursue the policy on stabilizing the macro economy, making the banking system healthy and perfecting the legal framework for the monetary policy implementation.

The State Bank has done many things over the last two years when dealing with the problems in the national economy and the banking system. The inflation has been decreasing, while the banking system and the foreign currency market have been stabilized, and the foreign currency reserves have increased significantly.

However, problems still exist which require the government to strengthen the consolidation of the banking system, and to restructure the state owned enterprises.

The two goals prove to have close relations, since state owned enterprises play a very important role in the Vietnam’s national economy. They are also the big clients of banks and need to take partial responsibility for the bad debts

Vietnam, after a long period of applying an easy credit policy which has led to the high inflation and the credit bubble busting, has taken important steps since 2011 to congest the inflation and stabilize the finance market in an effort to avoid the banking system crisis boom.

The widened gap between the VND and dollar interest rate has helped restore the confidence in the local currency, thus helping stabilize the exchange rate and increase the foreign currency reserves.

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Forex market to debut this year

Myanmar’s first foreign currency trading market is set to be launched this fiscal year, the Central Bank of Myanmar announced.

“We plan to launch forex trading this fiscal year after domestic banks learn how to operate such a market,” an official from the bank’s foreign exchange management department said last week.

Currently, exchange rates are set on weekday mornings according to the reference rate and daily auction of the central bank. Once inter-bank trading begins, banks will be able to negotiate the rate with each other, which could see it changing in minutes or seconds.

“When the market is no longer regulated … it becomes competitive and tends to stabilise,” the central bank spokesman said. The new system will also give foreign businesspeople “more confidence in the Myanmar currency market” because the central bank will only intervene “gently” to maintain a stable and strong market, he added.

Executives at Myanmar banks began receiving training in foreign exchange trading last month from Japan’s Sumitomo Mitsui bank, with about 90 participating in the first training session in the last week of May. The ongoing training sessions are organised by the Japan International Cooperation Agency.

A code of conduct for currency trading was also drafted last November by the central bank when the Yangon Foreign Exchange Market Committee was established. The committee represents the 16 domestic banks authorised to deal in foreign currencies.

U Pe Myint, managing director of Cooperative Bank, said large domestic banks – such as Kanbawza, Ayeyarwady, Asia Green Development and his own – will be the first to trade in a forex market, with smaller banks following later.

Kanbawza Bank general manager U Kyaw Lin Htut said staff will be sent to other countries for training and monetary experts will be brought to Myanmar to provide training. He expressed optimism about the impact of a liberalised foreign-exchange market. “We won’t need to go to the central bank for the daily auction anymore. We can define the market ourselves and I believe it will become more energetic.”

U Kyaw Lin Htut added that some rules and regulation for a forex market are still being drafted. For example, it is still unclear whether the market will operate electronically, as in international practice, or over phone lines.

In the week to June 4, the daily reference rate of the Central Bank was K945 to the US dollar, down slightly from K949 to the dollar for the week to May 24. On the black market the kyat had been trading at 1000 to the dollar late last month in anticipation of further declines, but has shifted closer to the central bank’s rate since then.

The central bank spokesperson said the kyat had stabilised after its swift decline last month because demand for US dollars had cooled.

He declined to respond to speculation that the central bank had intervened to support the kyat, saying only that it was “following the market”.

He declined as well to say whether further declines were possible.

“We cannot forecast the future exchange rate – that depends on many factors – but our duty is to maintain a rate that does not have too much impact on the market.”

y Aye Thida Kyaw   |   Monday, 10 June 2013

Experts urge central bank rethink as kyat slides

Monetary experts urged Myanmar’s central bank to set an exchange rate that balances the need to generate exports and maintain affordable imports, as the national currency continued its month-long slide against the US dollar.

The Central Bank of Myanmar’s daily exchange rate, which is determined through foreign currency auctions with domestic banks, was K946 to the dollar on May 23, while official money changers were buying dollars for K945 and informal changers were offering K953-955.

On May 25, however, the kyat fell to 1000 for one dollar on the black market.

In official trade the kyat fell 2.3 percent against the dollar in the week to May 23, from 925 on May 17.

Matt Davies, deputy division chief for the International Monetary Fund’s Asia and Pacific department, told The Myanmar Times that exchange rate fluctuations have the potential to greatly impact on the nation’s trade sector.

He said on the sidelines of an IMF press conference that Myanmar needs to find a balance between allowing the US dollar to appreciate and making the nation’s exports cheaper abroad, while keeping the price of imports affordable as the country grows.

Myanmar has made great strides in liberalising its foreign exchange regime since President U Thein Sein took office, including allowing new private banks to open, giving permission for banks to open official money exchange counters, installing automatic teller machines and legalising remittances from abroad, Mr Davies said.

In April 2012, the central bank began a managed float of the kyat by holding daily currency auctions. The rate set by the bank is then used as a benchmark for private banks and private exchange counters, which are allowed to change money within 0.8pc of the central bank’s rate.

Mr Davies said the central bank is working to minimise exchange rate fluctuations without targeting a specific rate. However, it has also supplemented its foreign currency reserves by buying dollars and other foreign currencies, which is weakening the kyat.

He advised the central bank to build up its reserves so it has a buffer against external shocks.

Equipping the central bank with the tools to conduct domestic monetary policy is important for delivering the stability necessary for sustained economic growth, he added.

Mr Davies said inflation remains moderate at present but there are pressures, including from money growth, real estate prices and wage increases.

An official from the central bank’s foreign exchange management department said the dollar is appreciating against the kyat because private banks are bidding higher at the daily currency auctions.

“We can’t say the appreciation is too great … there are many factors that are coinciding to form a trend,” he said.

When the central bank started the managed float of the kyat, the dollar bought K818 but in the past 13 months it has appreciated by more than 15pc.

The official said the daily rate has seen changes up to a maximum of 1pc, adding that fluctuations would be larger if the central bank did not hold the auctions.

“This is not just a problem in Myanmar; we also have to deal with changes in the international economy. But we have to avoid fuelling an inflationary situation,” he said.

Even though the central bank has not been made independent from the Ministry of Finance and Revenue – and will not be until after the Central Bank Law is passed by parliament and signed into law by the president – it can act to change monetary policy, he said.

A finance officer at a joint-venture between foreign and local partners said the swift fluctuations created occasional problems with customers.

“We have to negotiate with the Internal Revenue Department and customers when the exchange rate changes too much in a month,” she said.

She added that the variance between the rates offered at official money exchange counters and in the informal market – as much as K10 to the dollar on May 22 – also drew complaints from customers.

Economist U Khine Htun said the dollar is strengthening against the Japanese yen, the British pound, the Australian dollar and the kyat.

He added that another factor causing the dollar to appreciate is the start, in March, of the withdrawal of Foreign Exchange Certificates (FEC) from the market.

He said businesspeople only want dollars now, adding that traders say they hope to see a stable exchange rate of about K1000.

Myanmar must not allow imports to become too expensive because there is a huge need to import materials to build infrastructure projects such as special economic zones in Yangon, Dawei and Kyaukpyu, U Khine Htun stressed.

The appreciation of the dollar benefits exporters – chiefly those selling natural gas, agricultural goods and fisheries products – but hurts importers of fertiliser, cement, diesel and the cheapest cooking oils.

“It encourages the export first-policy, but the immediate fluctuations are harming the whole economy and destabilising the market,” U Khine Htun warned.

“The central bank has not intervened effectively in the monetary market yet. It is acting more like a referee as currencies are traded by banks.”

By Aye Thida Kyaw│24 May 2013│The Myanmar Times

SBV has room to further cut deposit rates

HA NOI (VNS)— The State Bank of Viet Nam has the margin to further cut dong deposit rates to 7 per cent and lower lending rates to below 10 per cent, the National Financial Supervisory Commission (NFSC) recently revealed.

In a study on the country’s macro-economic performance in the first quarter of 2013, the Commission found that with domestic consumption and credit demands remaining weak, this year’s inflation was likely to remain under 7 per cent.

This is further evidenced by average statistics for the past decade showing that inflation in the first quarter often accounted for roughly 40 per cent of the whole year’s inflation.

The Commission observed that in the first quarter, bank liquidity generally remained stable and interest rates tended to fall in tandem with inflation movements; yet the rate of deflation did not match up to businesses’ expectations.

Slow credit growth in the manufacturing sector reflected weak capital absorption of the economy, the report noted. As of 21st March, total lending increased only 0.03 per cent, while deposits rose 3.86 per cent from the end of 2012.

Government bonds were still an attractive investment channel for banks with their attractive yields and apparently low risks.

However, with non-performing loans still posing major obstacles for enterprises to access bank capital, the credit growth target of 12 per cent this year is unlikely to be achieved.

According to the NFSC, the exchange rates remained stable due to the trade surplus and improved short-term investments.

The NFSC further recommended the government to give more support to enterprises in order to boost production and business by cutting interest rates, reducing corporate income tax to 20 per cent as well as considering cuts to value added tax (VAT).

The Commission further highlighted the need to accelerate the process of dealing with non-performing loans, explore the possibility of starting a debt asset management company in the near future, and actively launching a preferential credit package to support the construction sector and the real estate market. — VNS

FEC dollar surrogate abolished

Foreign Exchange Certificates (FEC) are no longer needed in lieu of US dollars following a decision debated in the Pyidaungsu Hluttaw and signed by President U Thein Sein on March 20.

“Although FEC is abolished, the certificates can still be exchanged for USD or handed over in banks. Hluttaw representatives approved the decision because FEC is no longer needed by private busineses, as official exchange currency is now widely available in Myanmar,” said U Sai Thiha Kyaw, a member of the parliament’s Public Accounts Committee.

He added that the move to abolish FEC was advised by the International Monetary Fund.

A spokesperson for the Foreign Exchange Management Department (FEMD), which operated under the Myanmar Central Bank, said that banks will be able to replace FEC with either USD or kyat; or, later withdraw them as kyat.

“The value of FEC is the same as USD, so we will ensure that FEC holders do not lose their money,” the spokesperson told The Myanmar Times on March 20.

The bank announced it would abolish the use of FEC in August 2012, slated for March 2013. FEC was originally introduced by the bank to Myanmar in 1993, meant for foreign travellers to use while inside the country.

“The government agreed to abolish it this month because April starts the new year for the budget. We have been preparing for the change since we announced it [in August].

We tried to keep and collect any FEC that entered the bank, and changed it to kyat or USD for customers,” the spokesperson said.

As a result, the FEC value a dollar jumped K5 to 10 higher in January as the certificates demand overreached supply; the FEC stabilised in February.

Following the hluttaw’s decision, the FEC value stands at K875-880 while the USD is K880-88 on the black market as of March 21. The exchange rate for FEC and USD at official money changers and banks stands at K881-887 as of March 22.

 

One year on, exchange rate ‘stable’: Central Bank

After five decades of instability, the exchange rate between the kyat and foreign currency has stabilised over the year since the Myanmar Central Bank implemented a managed float in April 2012, the bank and local economists said.

The past 50 years have been marked by discrepant exchange rates in the trade and investment sector, on duty and tax charges and between official and black market money changers.

But the MCB, in a bid to stabilise the fluctuating kyat, put a managed float on currency on April 1, 2012. It also allowed Myanmar nationals to legally hold USD in August 2012.

Under Myanmar’s managed float, banks and official money changers are allowed by the MCB to set their exchange rate within 0.8 percent of the daily auction rate. It became compulsory for Myanmar’s entire financial sector to adopt the managed float, MCB’s deputy director general U Win Thaw told The Myanmar Times on March 19.

“The Central Bank wanted to emphasise the development of foreign exchange and stabilise the exchange rate. Over the course of the year, it has stabilised and it is appropriate for both import and export,” he said.

Prior to April 2012, the MCB allowed six private banks to open official exchange counters on Theinbyu Road in Yangon in October 2011. The money changers eventually expanded to airports, hotels, shopping centres and to a network of 18 privately operated banks.

The MCB, in a bid to expand their monetary market, next allowed companies to open official money changers if the companies could prove K30 million (about US$34,000) in capital and a proven history of accordance to foreign exchange rules and regulations.

When official money changers opened in December 2012, both the official and the black market rate stood at K860. On March 12, there was a temporary discrepancy between the official market rate and the black market rate of K20; on March 18, the rate again stabilised and now stands at K880 for official money changers, while the black market rate stands at K885.

“The Central Bank has received some serious criticism while trying to stabilise the monetary market. Some people have criticised the Central Bank for being very reluctant to change, while others don’t want to agree on a daily exchange rate,” said U Win Thaw.

“This is a very new practice for us. We’re keeping an eye on the economic situation of the country, and we also are looking at regional banking systems.”

Tourists are also affecting the stabilising exhange rate.

U Win Thaw said that the new influx of foreign tourists to Myanmar will continue to depreciate the kyat.

Consultant and senior economist for the Ministry of Commerce, Dr Maung Aung, said the kyat has depreciated from K850 to K880 a dollar since the MCB implemented a managed float.

“The exchange rate is more stable than in previous years, so traders can do their work with confidence. But I hope that the kyat will depreciate to K900 to benefit the agriculture and fishery industries,” he said on March 19.

The vice president of the Union of Myanmar Federation of Chambers of Commerce and Industry (UMFCCI), Dr Maung Maung Lay, said the managed float suits domestic traders and foreign investors.

“The former rate of K6 a dollar did not work, because investors expect an exchange rate that reflects the actual market when they invest their capital. Now they do not have to worry with K880 as the official exchange rate,” he said on March 19.

Before the MCB attempted to stabilise the exchange rate with a managed float, foreign investors could only receive K6 a dollar.

By Aye Thidar Kyaw   |   Monday, 25 March 2013  |  The Myanmar Times