5 posts tagged “currency”
Ten days ago I reiterated my view that "The dollar will collapse and US interest rates will have strong upward pressure" (see US Economic Prospects: These are the Good Days. March 10, 2009). And this seems to be happening, faster than I expected.
And within a few days ago, the first sign of these movements took place, with the US starting to buy up long term debt, causing the US dollar to decline for the week by more than 5 percent against a basket of currencies. This has been the largest decline since 1985. And according to Reuters, a fall of 5.2 percent at the close later on Friday would [would] make this week's dollar plunge the biggest since 1973 when the Bretton Woods system of fixed exchange rates was finally abandoned. This decline may also signal an equally significant currency regime change and shift in long run US economic role and fortunes.
From the US government perspective, this is a good move, assuming they also see the same crisis on the horizon. Essentially, they are shifting borrowing that would be short term (e.g. 90 days) to long term debt. This would make a lot of sense if they thought that short term rates would increase substantially during the term of the long term debt, and not have much prospect of falling again. It is an unprecedented opportunity to profit from intertemporal (between time periods) arbitrage -- an opportunity of which few others can take advantage.
By the way, if you haven't read it already, you should see Wired Magazines excellent article about David X. Li's Gaussian Copula Function, and how its misuse to measure risk in Credit Default Swaps (CDS) has been a key factor contributing to the current credit market crisis.
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all d
Pacific Airline traffic is declining: Delta, the world's largest airline, said its transatlantic capacity this winter would be down 11 percent to 13 percent compared to the winter of 2008, while its transpacific capacity would be down 12 percent to 14 percent. They are cutting capacity by an additional 10 percent in September following earlier cuts. (REF: reuters.) The number of foreign travelers entering Vietnam by air is reportedly down dramatically in 2009, although cruise ships tours are up (REF: vietnamnet.)
Vietnam's Economy is starting to feel the heat. For a long time the global meltdown had apparently left Vietnam largely untouched.
Even this year some employees of mine complained when I gave them pay raises of only 100% per year. I suspect we will learn that last year's double digit growth in wages has not persisted into 2009. The real culprit is a lack of information that reflects the increasingly harsh economic reality. The Economist reports that the economy needs about a million new jobs each year just to provide work to new entrants into the economy. Yet last year about half a million workers lost their jobs, and almost as many may lose their jobs this year. That year saw 6.2% economic growth, the lowest rate in nine years. For 2009, the IMF, and many other observers outside the Vietnamese government, believe that economic growth will decline to 5%. Part of the problem is that the government is still trying to cover up the problem, and insists that it can achieve 6.5% growth. Either figure is a big decline compared to last year's government declarations that 2009 would see 8.1% economic growth, and expectations based on 2007's reported growth of 8.5%.
Local consumer demand has collapsed. Sales during the Tet holiday in January were down 50% from the previous year. Car sales were down 68%. Clearly the downturn is affecting more than just rice farmers and labourers, it is also being felt by the middle class, and the rich (note that a basic car that would cost $25,000 in the US costs almost $70,000 in Vietnam after taxes, duties and shipping).
Vietnam's economic growth has been driven primarily by exports, and sustained by domestic oil resources. Domestic demand has largely contributed to a trade deficit. Yet exports fell by 5.1% year-on-year in the first two months of 2009, with electronic goods down by 13.7% and shoes by 7.3%.
REF: The Economist
Compared to the Global Economy, and the rest of the developing world, Vietnam remains relatively lucky. The World Bank has announced (recognized) that the global economy is likely to shrink in 2009. Global industrial output could be 15% lower, year-over-year, by the middle of this year. And developing countries will find they have a financing shortfall of about $700 billion this year -- massive growth in rich world (e.g. US) borrowing, and restricted supply, are leaving little left for the economically uninfluential poor of Asia and Africa. REF: BBC
Today's black market rate (in one competitive jewelry store) shows the US dollar falling in value and black market rates moving closer to official rates.
The black bid rate was 17,400 VND/USD. In other words, they will pay you 17,400 Vietnamese Dong for one US dollar.
The black ask rate was 17,520 VND/USD. If you have 17,520 Dong, you can buy a dollar.
Transactions are usually in crisp, unmarked one hundred dollar bills. Rates are less favourable for other denominations or conditions.
Note the very narrow 120 Dong (0.69%) spread.
Compare the black market rate to a 16,845 official bid rate for June 29, on Yahoo Finance.
My ability to convert US Dollars to Dong was strictly limited the last time I went to HSBC in Ho Chi Minh City. Any withdrawal or transfer over $5000 was subject to a 1.6% fee. Under this amount, there was no charge. Exchange rates were very close to USD/VND bid rates posted on Yahoo! Finance. So apart from the fee, the transaction was priced properly at controlled non-black market rates (see an earlier post).
This sends entirely the wrong signal. A fee that increases as a percentage with the size of the transaction is a sure sign of a liquidity crisis. HSBC is screaming to its customers that it does not have enough cash. And as I noted before, I could not even withdraw more than $30 in small change.
Today (March 20th, 2008), the situation had changed for the better. A fee of 0.6% applies to USD-to-VND conversions over $20,000. The fee is declared at the counter (see picture below), but the limit is not mentioned. So presumably that floats. But of course, the rules seem to be flexible from day to day. This is also not a good practice for instilling a sense of calm among customers.
Again, apart from the fees, exchange rates were highly efficient. They gave a rate of 15,840 Dong to the Dollar, compared to a Yahoo! Finance posted last transaction and bid rate of 15,850.
Imagine a crisis leads you to expect customers to come rushing to your doors the next morning. What do you do? Open late? Try to limit customer access to their cash? No! You bring every member of your staff into your banch to process transactions. You open two hours early. You never let anyone line up outside your doors in the morning. You get everyone in and out as fast as possible. Within the constraints of not letting lines go outside, and eliminating any initial opening panic, make sure lines are very long and tedious, but process everyone's requests promptly and without hesitation, no matter how much they wish to withdraw. Give people large bills, so their withdrawals do not stand out to other customers. One thing one should never do is introduce any charges or fees, or other actions that ever suggest to customers that you are limited in your ability to meet any and all demands for any amount of cash.
With the US dollar coming under relentless downward pressure against most major currencies, stock markets being hammered, and interest rates driven down by the Fed, it is not easy to justify keeping assets in the dollar if one has the choice to pull out.
Perhaps it would be wise to buy Vietnamese Dong (VND)? The Vietnamese government has set a fixed exchange rate at a level that is almost universally considered much higher than the medium term rate. So profits are built in. But banks are fighting back and doing everything they can to prevent people from buying at the artificially low VND exchange rate (according to The Financial Times):
In the black market, the dong is already trading at around 15,650 to the dollar, around 2.4 per cent stronger than the official exchange rate of 16,037 to the dollar. Banks are also trying to circumvent the exchange controls – some by levying special fees to change dollars into dong, or by converting dollars into third currencies, then converting that into dong.
The black market rate for the dollar on Ha Trung street in Hanoi is quoted at VND 15,800 compared to an official rate of VND 16,054 by the International Herald Tribune on Feburary 28, 2008.
One must also consider the cost of getting money out of Vietnam. There are generally fees of around 3% for converting Dong back into USD. The existence of export restrictions has led to significant smuggling of money out of Vietnam.
However, Vietnam has its own monetary problems. Inflation in February 2008 was 15.7 percent. The communist central government is reportedly trying to restrict the money supply in order to fight these inflationary pressures. But this should cause even greater pressure for the currency to rise against the dollar.
Monetary policy has caused local currency shortages. Investors have had a hard time getting cash out of banks for their massive investments. Remember, in Vietnam, without cheques, and a cash culture, even massive transactions often take place in even more massive piles of physical cash -- only ten percent of Vietnamese have bank accounts. Even individuals have been hurt by the cash crunch, with at least one local bank this week arbitrarily limiting cash withdrawals to individuals to VND 3 million (USD 187).
The Financial Times cites cases:
In one sign of the currency crunch, last week Hanoi was forced to give special permission to Morgan Stanley to pay $217m in dollars for a 10 per cent stake in PetroVietnam Finance Corp, instead of making the payment in dong, as is normally required by law.
Elsewhere, an accountant for a foreign firm tried to convert $30,000 into local currency to pay staff salaries and office rent but was turned away when the bank said it did not have enough dong.
“It’s outrageous,” said a foreign executive, spurned in a recent attempt to convert dollars to dong. “We are going to have to go to the automatic teller machine and draw money out to pay salaries by hand.
And small change has also become strictly limited. Recently, when making a VND 65 million (USD 4,053) withdrawal at HSBC's head office in Ho Chi Minh City, the bank refused to give me any more than VND 500,000 (USD 31) in small VND 5,000 (USD 0.31) bills citing currency restrictions. The bank would not even let me place an order for small currency to be delivered at some later date, such as a few weeks in the future. Can you imagine running a business in the US and having your bank flatly refuse to give you more than $30 in quarters, and completely refusing to give you any stock of nickels or dimes?
