By Van Nguyen
Aug. 8 (Bloomberg) -- Vietnam should make the dong more flexible and allow the market to determine the exchange rate, according to the former head of a state-run research institute.
The State Bank of Vietnam's curbs on the currency and local banks are ``distorting the economy'' and policy makers must give lenders freedom to run their business, Nguyen Van Nam, former director of the Hanoi-based Ministry of Industry and Trade's Institute for Trade, said in an interview yesterday. The dong is allowed to move by up to 2 percent on either side of a daily reference rate set by the central bank.
Vietnam has raised the benchmark interest rate three times this year to the highest in Asia as inflation quickened to the fastest in at least 16 years. It doubled the daily dong trading band to 2 percent and capped this year's credit growth at 30 percent, from 54 percent last year. Factory workers went on strike in Ho Chi Minh City this month demanding higher wages, VietnamNet reported on its Web site on Aug. 6.
``I am concerned Vietnam will have more chaos with this kind of government control and unpredictability in policy making,'' said Nam, who is leading a team to study and advise the government on economic management. He will submit a report to the Prime Minister at the end of 2009.
Morgan Stanley in late May had predicted a run on the currency, saying many of the classic fundamental conditions are in place including ``an overvalued currency, a dangerously unbalanced economy and low foreign-exchange reserves.'' The controls on the currency forced foreign investors into the black market to obtain dollars, with the gap between the official rate and the street rate as wide as 7 percent in early July.
Supply and Demand
The dong has advanced 1.8 percent in the past month, trimming this year's losses to 3.2 percent, after the central bank on July 21 assured investors it had sufficient reserves, without revealing details, and urged people not to rush in to buy dollars.
The dollar traded for 16,450 dong on the street, according to a telephone information service run by state-owned Vietnam Posts and Telecommunications, compared with the official rate of 16,550 as of 3:36 p.m. in Hanoi.
``The authorities should let supply and demand determine the exchange rate rather than use the official fixing rate as a signal where the bank desires the rate to be,'' said Daniel Hui, a Hong Kong-based currency strategist at HSBC Holdings Plc.
Capital Shortage
Companies are facing severe capital shortage while banks can't lend money even though some banks have sufficient reserves, according to Vietnam's former researcher Nam.
``By imposing a daily exchange rate and telling banks which businesses to lend, the central bank's controls are distorting the economy,'' he said.
The dong is the third-best performer among the 16 most- traded currencies in Asia outside Japan in the past month. The central bank set a stronger reference rate for dong trading each day this month.
When the economy shows signs of improvement, the government should reduce its control and encourage free-market principles, Nam said.
To contact the reporters on this story: Van Nguyen in Ho Chi Minh City at vnguyen23@bloomberg.net
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