Vietnam's chronic currency weakness takes toll on firms
HANOI (Reuters) - For Ford, one of the greatest challenges doing business in Vietnam this year is not selling cars but finding enough U.S. dollars to pay its overseas suppliers on time.
It's a problem that underscores the difficulties of doing business in a country where confidence in the local currency is low, and where the U.S. dollar is still king and often scarce due to hoarding by a wary public.
By law, Ford Vietnam can only earn money here in the country's non-convertible dong currency, while it pays most of its suppliers in hard currency because at least 85 percent of the content of its vehicles is imported.
"We've had days when the treasury guy's come in and said: 'We just can't get enough U.S. dollars'," said Michael Pease, General Director of Ford Vietnam.
"And we've had to make a choice at that point, whether it's feasible for us to get another currency or whether we need to go back to our suppliers and simply say, look, based upon the bank advice we won't be able to remit the funds on the date that we had committed."
Ford has had little problem selling cars in a market which saw auto sales more than double in September, compared to the same time last year, partly due to a government stimulus plan. It's main headache has been getting hard cash abroad.
The local unit of the No.2 U.S. carmaker ranks sixth among auto manufacturers in Vietnam in terms of sales so far this year, having sold 4,852 vehicles in the first nine months, according to the Vietnam Automobile Manufacturers' Association. Pease said he expected sales this year to be about on par with last year.
But getting hard cash has been a different story, and the possibility of a devaluation, an ever present worry.
Ford has not been alone. For the past year or so, psychological and market factors have created a shortage of dollars in the official market and kept the dong at or beyond the weak end of the band it is allowed to trade in against the dollar, making life tough for importers across the board.
The government has given priority access to foreign exchange to certain businesses, including oil products and fertiliser.
But a range of industries, some dominated by state-owned companies, have been hit by the dollar shortage. In July, the Vietnam Steel Association wrote a letter to the Prime Minister saying members risked having to close if they could not get the dollars to import scrap metal.
While most Asian currencies have been strong this year against a weaker dollar, Vietnam has defied the trend. The central bank has been unable to bring it back into the band, creating a major problem for the economy and a risk to investors.
This month marks one year that the dong has been consistently at or past the weak end of its trading band. This is despite a 3 percent devaluation in December, the widening of the band to 5 percent from 2 percent on either side of a daily mid-point set by the central bank, and a range of administrative measures.
Officially, the dong is now only allowed to go as weak as about 17,845 per dollar under its crawling peg, but in reality -- in gold shops and in the interbank market via creative transactions -- it is trading closer to 18,250.
Many economists, interbank forex traders and black marketeers believe the dong will weaken in the coming months as the lunar new year approaches, the trade deficit widens, inflation rises and fast growth returns. Some think it will hit 19,000.
Vietnam's economy, which relies heavily on exports of commodities, like rice and crude oil, and textiles, as well as remittances from abroad, has weathered the economic storm fairly well, with GDP growth in the first three quarters up 4.6 percent. The full year target is around 5 percent, which economists consider respectable, despite being below the 6.2 percent growth last year and even higher in previous years.
BLACK MARKET, REAL MARKET
For smaller businesses and individuals, the official rate is almost irrelevant and the street rate is the one that matters.
"I have never bought a single dollar at the official rate from the banks," said a copper wire producer based in Hanoi who declined to give his name because buying or selling foreign exchange on the black market is technically illegal.
"The banks introduce me to a gold shop where I can buy dollars that can be automatically deposited into my account with the bank, then I can transfer them overseas to pay contracts."
Gold shops double as foreign exchange dealers, with the big ones buying or selling as much as $2 million (1.2 million pounds) a day. Business has not slowed during the global downturn.
"The black market here is the real market that keeps the economy going. Everything would be dead if the black market didn't exist," said one gold shop forex dealer who sits before a bank of incessantly ringing phones. Customers flow in and out with bricks of cash.
"If the central bank can't successfully manage the situation then it has no choice but to let the market manage things."
Some think the State Bank of Vietnam (SBV) is doing just that, reasoning that it is not such a big problem if the exchange rate is outside the band as long as it remains relatively stable.
In fact, the central bank has its hands tied behind its back.
Firstly, it is not independent; the SBV answers to the Prime Minister in this communist country, just like a cabinet ministry, and requires his signature for major decisions.
That means when the government is focussed on stimulating economic growth, as it is has been in recent months, monetary tightening is out of the question.
Secondly, economists say Vietnam's foreign exchange reserves are insufficient for the type of sustained intervention that would be needed to keep the dong within its band. At the end of June, forex reserves stood at $17.6 billion, depleted more than 23 percent from the end of last year, and could be lower now.
The central bank has muddled through, rationing dollars to strategic industries /and waving a big administrative stick while nudging the reference rate down to ease pressure.
RISK OF DEVALUATION
Ultimately the situation is damaging, economists say.
High-profile businesses like Ford cannot turn to the black market for hard currency because it is illegal. Ford, also, has been given instructions to report to the central bank if its banking partners levy fees to try to create a different rate.
Ford's Pease has added the possibility of payment in euro or yen to his suppliers so that at least he can give them something on time. The SBV does not restrict trade with those currencies, and their rates are near what the black market dollar rate is.
"It's an issue that I think most companies these days tend to recognise as a cost of doing business," he said.
Vietnam's long love affair with the dollar is hard to explain and perhaps out of step with the rest of the world where there are calls for another currency or currency basket to replace the greenback.
Since reforms started in the late 1980s, and probably even earlier, gold and dollars have been in favour because the government could not control rampant inflation.
Economists say the dollarisation of the economy is a hard habit to break because gold, a substitute for dollars, helped some families escape during the war years in the 1970s, and many people still remember the days of hyperinflation in the 1980s.
More worrying today is the possibility of a devaluation that seems ever-present when the currency is chronically weak, the central bank unable or unwilling to rein it in and little confidence in the market in a strong dong.
Psychology is critical. For part of the year, exporters sat on dollars expecting the dong to fall. That exacerbated the dollar shortage, which put tangible pressure on the Vietnamese currency to do exactly what everyone thought it would do, fall.
But that was just one part of the story. Benedict Bingham, the International Monetary Fund's Vietnam representative, thinks the actions of millions of households shifting their personal holdings into gold and dollars amid economic uncertainty may have also had a big impact.
In the first half, Vietnam's balance of payments was stronger than last year, the trade deficit was lower, and although foreign direct investment and remittances were also down they did not offset the decline in the trade deficit. Yet there was pressure on the dong, possibly because of this shift in household demand.
"This may partly be because domestic interest rates have been reduced so sharply, compressing the spread between dong and dollar interest rates beyond the point where it provides an adequate cover for exchange risk," Bingham said.
"It may also reflect concerns about the outlook for the dong itself. Either way, it is a situation that monetary policy needs to respond to."
(Additional reporting by Nguyen Nhat Lam; Editing by Megan Goldin)
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