Risks from Foreign Invested Capital

Experiences from developed countries exposed that the effective confrontation with international capital flow in the first period of financial integration process plays an important role for a country’s stable economic growth.

In my opinion, we need some important policies in the near future:

Capital control

After join to WTO, capital flows will pour strongly into real estate trading fields of Viet Nam. (Photo: T.C)

Capital control is one of the important policies that the Government needs to make known to investors.

Together with other macroeconomic policies, capital control aims to legally change the scale and structure of the capital flow pouring into Viet Nam with the tendency of encouraging long-term capital sources.

It is forecast that, after Viet Nam becomes an official member of WTO, much capital flows will be poured into the financial investment and real estate trading fields of the country.

The Government should carefully consider and analyze the long-term impacts of these capital flows on the country’s economy to build up an effective capital control framework.

Prevent high evaluation towards domestic currency

Many recent researches show that Viet Nam Dong is evaluated “quite high” in comparison with the US Dollar.

The high evaluation towards Viet Nam Dong can easily bring implicit insecurities to the domestic financial system.

Financial institutions are tending to borrow foreign currencies with cheap interests because Viet Nam Dong is highly valued and the domestic interest is often higher than those of strong foreign currencies.

This is an implicit risk for the country’s financial market once the domestic currency is depreciated.

Control currency supply at any cost

The capital flows has brought the presure of pushing up VND's value compared with US$. (Photo: T.C)

It is possible to see from the reality that capital flows will be poured strongly into a country’s economy once it integrates widely into the global financial market.

Continuous forecasts about the pouring of investment waves into the country’s economy recently when Viet Nam becomes the 150th official member of WTO is an obvious evidence for this ability.

This situation has created the pressure of pushing up the Viet Nam Dong’s value compared with US Dollar.

In order to loosen the increasing value pressure of Vietnam Dong and the hot development of economy, the State Bank of Vietnam (SBV) must join the foreign exchange market to buy in US Dollar from commercial banks.

The national foreign currency reserves has increased quite strongly recently (around US$10 billion) by partly using such process.

However, the increase of Viet Nam's foreign currency reserves is mainly from the recent remarkable increase of foreign currencies earned from export.

It is sure, in the post WTO period, that the national foreign currency reserves will further increase due to SBV’s more absorption of foreign invested capital flows.

However, everything has its negative side. The domestic currency supply increase has put more pressure on capital inflation, which has already had speed-up signal during the last 2 years.

That’s why it is necessary for the Government to develop a legal route on issuing more bonds to reduce the currency supply on the “open market”.

A challenge for the Government is that there was little interference like that in the past time.

Such interference should be more regularly applied to correspond with the investment waves in the post-WTO period.

SBV only controls the transactions through the bank systems. (Photo: T.C)

What we worry now is the non-synchronous coordination between SBV and Ministry of Finance (MOF) in controlling the economy’s total volume of currency circulation.

SBV mostly controls the transactions through its “own system”, which means through the bank system; while the currency transactions through credit operations of other organizations such as Treasury, Development Assistant Fund (which is now Vietnam Development Bank) and Insurance Companies are the “private affairs” of MOF only.

This certainly results in the fact that the currency operations of the overall economy are never shown in the bank system’s currency balance.

If this situation is combined with strong investment waves into the country’s economy in the post-WTO period, they will resonate with each other to put more pressure of inflation on the economy.

This is the price we have to pay for integration if there’s no sound solution from the Government.

“Financial policies being in conflict with currency policies” is something that should never reoccur if we don’t want to pay for inflation from integration.

Changing SBV into a Central Bank working independently with the Government is a long-term solution beside the necessity to rethink the current finance and currency policy controlling methods of SBV and MOF.

PhD. Tran Ngoc Tho – HCMC University of Economic

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Compiled by Tuong Chau

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