The official marketHistorically, Vietnam has struggled with inflation.
At its worst, back in the 80s, it went as high as 450 percent; more recently, it hit 23.1 percent in 2008, and 18.7 percent in 2011.
Since then, it has been relatively stable, hovering around 4 percent.
This has been on the back of a range of laws, decrees, and circulars that have given the SBV strict control over the foreign exchange market.
For example, currency traders need to be licensed by the bank with strict criteria as to who can and cannot buy foreign currency.
Moreover, it has taken to operating the local currency on what is referred to officially as a floating peg, though the IMF says is really more “crawl-like”. That is, it sets a central rate each day, with the dong only permitted to be traded 5 percent either side.
To keep it stable, the bank engages in open market operations, buying and selling securities.
It also injects US dollars into the market from its foreign currency reserves.
And it can raise and lower interest rates.
That said, on that last point, it’s important to remember that the SBV is not independent.
The government sets monetary policy, and it’s the SBV’s role to carry that policy out.
The unofficial market
US dollars are far less prone to big fluctuations than the dong, which makes them a more reliable store of wealth and popular among Vietnamese investors.
The aforementioned restrictions, however, can make it difficult to access foreign currency through official channels, which has given rise to an unofficial market.
In practice, this is often US dollars bought over the counter at jewellery or gold stores.
But there are also informal bank transfer systems, in which brokers in Vietnam collect dong from foreign workers and arrange for overseas partners to remit equivalent funds to their accounts at home.
How these markets interact
Firstly, the official market and the unofficial market are not mutually exclusive.
Rather, they compete for business in US dollars with the unofficial market paying a risk premium.
So, for example, as of Tuesday afternoon, Vietcombank was buying US dollars at VND 26,083, whereas unofficial traders were paying VND 27,580, according to TY Gia USD.
That is to say, selling US dollars on the unofficial market nets the seller about an extra 6 percent return.
This creates a compelling arbitrage opportunity.
Buying US dollars is legal if the buyer has a legitimate purpose, travel abroad being one.
Theoretically, at today’s rates, a traveller with a plane ticket to the United States could walk into a bank in Hanoi and buy US$5,000 worth of US dollars legally and then ride over to Gold Street and sell it for US$5,300.
Of course, buying and selling foreign currency outside of official channels is illegal, though the maximum fine for transactions under US$10,000 is just VND 20 million, roughly US$758.
On that note, as the premium becomes wider, the rewards increase, but the risk remains the same.
This disparity also encourages people to wait to exchange their dollars.
Remittances, for example, are a huge source of foreign income, with an estimated US$8 billion worth sent to HCMC alone, in the first ten months of the year.
Using the black market rate as an indicator of where the market is headed, it makes sense for overseas workers to hold off sending money home and to wait for the official market to catch up to the unofficial.
That is leaving US dollars sitting in an account overseas or under the mattress, or stored as a US dollar-pegged digital currency.
This last point adds a whole other layer to the complexities of trying to crack down on the illegal market — if it’s all online, through digital assets, it can be very challenging to track.
That is to say, dismantling the black market for Vietnamese dong will take more than a heightened policing of the practice, with the market simply adjusting prices to offset enforcement.
Ultimately, what is needed is a loosening of the peg and a rethinking of how the SBV manages convertibility.
