I went to exchange some U.S. Dollars (USD) into Vietnamese Dong (VND) today for the first time in a couple of months. I was surprised how much things have changed since then. It used to be that the gold shops around Vietnam offered a much higher currency exchange rate than the banks due to the high demand for dollars. The banks offer rates based on FOREX (foreign exchange market) and set by the SBV (State Bank of Vietnam), whereas the gold shops act as the de facto black market for the US Dollar/VND. People used to be willing to pay much more for the dollar because it (and gold) was viewed as a hedge against the rampant 20%+ inflation Vietnam has seen the last couple of years. The spread between the official exchange rate vs what the gold shops were offering got as high as 1,000VND/$1 Dollar….which would amount to an additional $5 for every $100 exchanged. Now the spread is only 90VND/$1 Dollar. 90 VND is less than 1 cent.
Today, I was quoted 19,070 VND/$1 US at a couple of different Gold Shops near Ben Thanh market and 18,980 VND/$1 US at the main HSBC branch on Dong Khoi. Less than 2 months ago $1 US got you 19,500 VND on the black market. What happened in the past couple of months that caused the spread to narrow so rapidly? And where has the demand for the dollar gone? It’s certainly not because the US Dollar is weaker. The Dollar has actually shown a lot of relative strength in 2010 compared to the other world currencies. And gold prices are at a record high which I would have expected to weaken the Dong.
Much of the dollar demand comes from foreign businesses that have to pay their suppliers in dollars. For example, Ford in Vietnam has to import as much as 85% of the materials it needs to build it’s cars from suppliers outside of Vietnam. To pay these suppliers, Ford Vietnam must try to exchange the Vietnamese Dong it earns to U.S. Dollars. In recent years it has been nearly impossible for many businesses in Vietnam to obtain a satisfactory amount of dollars from the State Bank of Vietnam which itself has not been able to purchase enough dollars to fulfill the foreign currency reserve ratio it has set for itself. It is illegal for businesses in Vietnam to exchange money outside of official channels, however many businesses ignore these rules and secretly obtain Dollars from the black markets where there is plenty of liquidity.
One reason that might explain the dollar weakness is that the Vietnamese economy is slowing down rapidly. Vietnam, like China, has seen property prices and foreign investments into the country surge…even as it’s stock market plunged not too long ago. But there has been reports from the local news agencies that many companies have seen demand for high ticket items plummet this year. Many car dealerships in Saigon are only selling 3-5 cars/month even though they have slashed prices to clear inventory; a year ago they were selling 30-50 vehicles/month. Car dealers themselves say that 50% of them could go out of business if these conditions persist even a few more months.
With dealerships struggling to sell cars, automobile manufacturers like Ford Vietnam have slowed down production which lessens their need to obtain Dollars to pay foreign suppliers. The VND has actually continued to weaken on Forex the past few months, however, because there is so much less demand for dollars on the black market the gold shops have been lowering the amount of VND they are exchanging for USD to just a bit more than the official rate.
It seems like there is no longer any reason to turn to the gold shops when exchanging Dollars. In fact it may be preferable to go to a bank because there have been some gold shops that have tried to slip in damaged bills when I have gone to exchange money. Most places of business inspect the bills they take in very carefully and will not accept even minor tears in paper money. I found out from my Aunt (Mo Bay) that you can take damaged bills to most banks and they will exchange the bill for a 4%-5% fee.