Vietnam’s 2016 changes in monetary policies and its potential impacts (to me)

Recent political turbulence has shifted long-term strategy of Vietnam. In an effort to alleviate economic dependence with conflicting neighbor nations, joining Trans Pacific Partnership (TPP) can be viewed as a stepping stone the S-shape country has achieved in 2015. In spite of obvious benefits to be a part of TPP, Vietnam now has to face an entire new set of formidable challenges in many aspects. This article will only present a limited review on the ongoing changes in Vietnam ‘s financial sector and its impacts to a fresh actuarial graduate.

A new mechanism for exchange rate

2015 witnessed a series of changes in Vietnam’s implementation of monetary policies. Currency pegging mechanism completed its mission to stabilize VN-USD exchange rate but the margin has increased from 1% to 3% in just a few weeks after Yuan devaluation. Translated into non-financial language, it means that for each transactions involving forex, although still in a known range, the uncertainty of exact amount does increase. In 2016, State Bank of Vietnam (SBV) has announced to replace pegging system with daily reference system based on market movement, promising more dynamic and frequent forex fluctuation.In short, uncertainties that companies are facing will be greater and changing faster.

Anti-dollarisation policy

SBV is also conducting a strict and strong anti-dollarisation policy. A decision, in my humble opinion, is appropriate at the moment.As Vietnam is now a member of TPP and integrated into its supply chain, there are many incentives for trading partners to conduct their business in USD. However, downside of letting USD become a dominant trading currency might outweigh its benefits.

Possible disadvantages of dollarisation:

• Losing public demand and control power over local currency will cut short SBV’s ability to implement monetary policy and exchange rate regimes.
• SBV would not be able to support national banking system as a last resort.
• To put it simply, let say you and your neighbors suddenly need a large amount of cash withdrawal. You all run to your commercial bank but there are not enough cash for all of you. There must be someone going home frustrated. The central bank can make sure that everyone stays happy by helping the commercial bank with their available/newly printed cash. (Ask a Greek how it felt like when an entire nation queued up for Euro)
• Most if not all the current local securities will need to be converted to USD. The process would require a significant amount of reserves, creating a heavy burden on national current account.

As a result, SBV has lowered interest on USD dominated savings to 0%. There is a speculation that they will soon go even further to impose a fee on these savings. This announcement, I have no doubt, will lead to drastic changes on how companies should set their USD reserves or exploit USD free cash flow when conducting business within Vietnam.

In the conclusion, the environments are no longer the same the minute you reach this line and it is still changing drastically. Knowledge of risks and integrated techniques to deal with them is now an asset needs to be sharpened. It was sad to hear many discouragements that I am deviating myself from a path of an actuary (?!?). However, I believe an actuary who stays comfortably in his technical realm might feel regret one day without expanding his horizon in an ever changing environment. Yes, I do feel an urge to learn beyond what my actual job might involve, to get a big picture because my dreams will need to go beyond that.