Usd/vnd Exchange Rate Developments During 11/26/2008

Borrowing capital from commercial banks is considered timely and appropriate, bringing great opportunities for enterprises to access capital, stimulate investment towards export and consumption. According to the official regulations implemented from February 10, 2009, the loan guarantee risk reserve fund is 200 billion VND, assigned by the Government to the Vietnam Development Bank (VDB) as the focal point. Enterprises of all economic sectors (including cooperatives) with a maximum charter capital of 20 billion VND and employing a maximum of 500 employees will be guaranteed loans. The conditions for enterprises to be guaranteed loans according to Decision 14/2009/QD-TTg are that the project scale and production and business plan of the enterprise must be at least 100 million VND, have no overdue debts at credit institutions, and have no tax arrears; have equity capital participating in the investment project of production and business, production and business plan of at least 10% and use 100% of the value of assets formed from loan capital (maximum 90%) and equity capital (minimum 10%) as collateral to guarantee the guarantee at the guarantor. The guarantee level is the maximum guaranteed amount equal to 100% of the principal and interest arising under the credit contract signed between the two parties with a maximum guarantee fee of 0.5%/year/guarantee amount. Within 20 working days from the date of receiving complete documents, the Vietnam Development Bank will conduct an appraisal, if qualified, it will issue a written notice approving the guarantee for the enterprise to borrow capital. In case of disapproval of the guarantee, the Vietnam Development Bank will notify the enterprise and clearly explain the reasons for disapproval.

The decision to issue a regulation on guaranteeing loans for enterprises from commercial banks has partly removed difficulties for enterprises in accessing capital, especially SMEs. The improved capital barrier helps enterprises to resolve concerns about resources, thereby expanding production and business, focusing on developing technology and products, expanding consumption and export markets, improving the competitiveness of enterprises... Across the country, commercial banks have simultaneously implemented Decision 14 of the Prime Minister. According to regulations, VDB only guarantees loans for enterprises from banks that have signed cooperation agreements with VDB. Therefore, many commercial banks have

Promote signing a cooperation agreement with VDB to help businesses quickly obtain capital guarantees from guaranteed capital sources.

With the aim of creating more momentum for SMEs to access credit support policies, on April 17, 2009, the Prime Minister signed Decision No. 60/2009/QD-TTg, amending and supplementing Decision No. 14/2009/QD-TTg dated January 21, 2009 of the Prime Minister promulgating the Regulation on guaranteeing loans for enterprises at commercial banks. Accordingly, the subjects guaranteed by the Vietnam Development Bank for loans are enterprises of all economic sectors (including cooperatives) with a maximum charter capital of VND 20 billion or employing less than 1,000 employees.

The above decision also amends the scope of the guarantee; does not guarantee businesses borrowing capital to implement projects, production and business plans in the fields of consulting, real estate business, securities business; services; borrowing capital to pay off debts of other credit contracts. Notably, the Prime Minister has made some new adjustments, related to the previous conditions, creating conditions to expand the supported subjects. According to the previous conditions, to be guaranteed a loan, the business must not have outstanding tax debts, the business must not have overdue debts at credit institutions and economic organizations and use 100% of the value of assets formed from loan capital (maximum 90%) and equity capital (minimum 10%) to mortgage to secure the guarantee at the Guarantor... But according to the new adjustments, the condition of outstanding tax debts is completely eliminated. In case an enterprise has overdue debts at credit institutions but has an investment project, a production and business plan and a commitment to repay the overdue debt, the guarantor will evaluate and decide to guarantee the loan. At the same time, the enterprise will use assets formed from the loan capital to implement the investment project as collateral to secure the guarantee with the guarantor.

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Box 3: Progress of implementing guarantees for businesses to borrow capital according to Decision 14/2009/QD-TTg of the Prime Minister.

- 100% of VDB branches have organized and implemented guarantee services for businesses to borrow capital.

- 34 commercial banks have signed a cooperation agreement to implement this guarantee service with VDB.

- 54 branches of VDB have signed to approve 192 guarantee notices, including guarantee approval notices for 13 projects and 179 production and business plans with a total approved guarantee amount of VND 1,073,618 million.

- 47 Branches have issued 90 guarantee certificates, of which certificates were issued for 2 projects and 88 production and business plans with the total amount recorded in the guarantee certificates being VND 541,988 million .

- Number of loan guarantee application files received and under appraisal is

291 records; of which, there are 69 project records and 222 production and business plan records [54].

Thus, according to the old regulations in Decision 14, the application of regulations on credit guarantees for SMEs in practice still has many limitations and has not yet brought into full play the maximum effectiveness and positiveness of the measure for enterprises. The capital level of 200 billion VND is too little compared to the guarantee needs of the current business community, especially SMEs accounting for 95% of the total number of enterprises. Moreover, the lending conditions are still too strict, while after a challenging year like 2008, the difficulty of SMEs at this time is overdue debt. In addition, the regulation on the guarantee recipient terminating the loan and collecting the debt before the due date if the enterprise violates the loan and credit contract causes many obstacles and risks for enterprises. An important point is that when SMEs access this source of capital, in addition to the interest rate that the enterprise must pay to the commercial bank, the enterprise must pay an additional guarantee fee of up to 0.5%/year/the amount of guaranteed loan. This is a significant cost that "increases the interest rate" that the enterprise must bear. At the same time, enterprises spend up to 20 days waiting for the bank to evaluate the effectiveness of the business and production project and up to 60 days waiting for the bank to receive the guarantee to agree on whether or not to perform the guarantee obligation. With the above regulation, enterprises must wait two to three months to see if they are guaranteed or not, and if so, it will take a long time before the loan is disbursed. Thus, the business opportunity of

Businesses will miss out, especially in export activities with foreign partners.

SMEs consider credit guarantees as a lifeline, a form of “sub-prime credit” through loosening the conditions for collateral-backed loans, thereby creating conditions for businesses to improve their ability to access preferential credit sources from the Government. Therefore, the issuance of Decision 60/2009/QD-TTg is a positive move from the Government to expand credit guarantee conditions, adding an important incentive for SMEs to access preferential capital sources, which is the basis for businesses to maintain and expand production and investment towards export.

However, the implementation of the Government's decision on guaranteeing loans for SMEs from commercial banks is only in its early stages, because guaranteeing is a long-term activity, not immediate like interest rate support or many other forms of credit support from the Government. Therefore, the problems will be gradually resolved to suit the actual situation in order to provide subsidies and incentives to the right subjects at the right time.

* Export credit insurance

In order to comply with its commitments when joining the WTO, the Government has innovated its credit support mechanism for enterprises by referring to and applying the export credit support mechanisms of the Organization for Economic Cooperation and Development (OECD) recognized by the WTO.

To continue supporting export enterprises in the new situation, especially SMEs, the Ministry of Industry and Trade coordinates with the Ministry of Finance and other ministries and sectors to research and develop some new forms of export support, in accordance with WTO regulations, one of which is export credit insurance. This is a fairly common form in the world, but has not yet been applied in Vietnam.

Currently, the Vietnamese economy is deeply integrated into the world economy, the need to expand export markets for businesses is inevitable and must compete more fiercely with foreign businesses. Therefore, the need for export credit insurance is necessary for businesses and credit institutions. Export credit insurance will create more opportunities for businesses in

Access to credit sources, development of export products and markets, and more confidence when penetrating risky export markets.

Currently in Vietnam, according to current legal regulations, export credit insurance is one of seven non-life insurance services. Non-life insurance enterprises are proactive in implementing insurance products (according to Decree 45/2007/ND-CP dated March 27, 2007); they only need to register the rules, terms, and premium schedules of insurance products with the Ministry of Finance before applying (according to Decree 42/2001/ND-CP dated August 1, 2001). Vietnam's export credit insurance market is still very large. It is time to implement this type of insurance in Vietnam, in order to provide financial guarantees for export enterprises, promote export activities, and orient export goods and services; through assessing commercial risks and political risks to advise and orient export enterprises on appropriate goods and services; At the same time, it reduces the risk of burden on the state budget arising from government guarantees for imports.

Since August 2002, the Prime Minister issued Decision No. 110/2002/QD-TTg, allowing industry associations to establish export insurance funds, but to date, only the Vietnam Rubber Association (VRA) has established an export insurance fund for the rubber industry since December 2006.

Rubber is one of the three agricultural products with the largest export turnover in Vietnam in recent years. In the context of frequent price fluctuations, in order to help members minimize price risks, the Rubber Industry Export Insurance Fund was established as a pioneer in the field of export credit insurance in Vietnam. The Fund's revenue comes from 1% of the export revenue of members participating in the Fund.

The Fund collected 50 billion VND in 2007 and 56 billion VND in 2008. The purpose of the Fund is to overcome and limit risks in rubber export due to price changes, unstable new markets, and risks in the production of export goods. The Fund also supports members with medium and short-term loans to boost rubber production and export, as well as trade promotion activities. Currently, due to favorable prices, the Fund

Not used for price risks but mainly to support members who are exposed to risks caused by natural disasters that damage orchards and affect export output.

Currently, the rubber industry has about 100 enterprises exporting to more than 45 countries, mainly SMEs. In the future, Vietnam's rubber export output is expected to double, from 600-700 thousand tons to 1-1.2 million tons by 2020. Therefore, the need to expand new markets and new customer sources is essential in addition to traditional markets.

The rubber industry needs export credit insurance because this is a form of encouragement for foreign importers to buy Vietnamese products when Vietnam wants to introduce products to new markets. Export credit insurance is also needed for foreign investors because the rubber industry currently invests a lot in Laos and Cambodia. Therefore, in addition to receiving credit from banks, investors also need insurance for at least 3 years to avoid capital risks.

From the reality of credit insurance in the rubber industry, we can see the importance as well as the benefits that export credit insurance brings. However, it has not been developed and expanded to its full potential. International experience shows that export credit insurance is directly managed by a government agency and is subject to the legal regulations of commercial insurance business, although it operates according to market principles and the law of supply and demand. Therefore, the Government needs to improve the legal and business environment based on WTO principles in parallel with studying and perfecting the model of the organization providing export credit insurance.

2.3.2.3. Exchange rate management policy

In the context of the economy increasingly integrating into the world economy, the level of liberalization of capital transactions is relatively high, fluctuations in investment capital flows, especially indirect capital flows, have strongly affected the supply and demand of foreign currency and exchange rates. In 2008, indirect investment capital flows have continuously fluctuated, causing an imbalance in foreign currency supply and demand. This capital flow increased significantly in the first three months of the year, causing pressure to increase the VND price, then showed signs of reversing, increasing foreign currency demand when the world economic situation continued to be difficult, the domestic economy faced inflation.

inflation, trade deficit increased. After showing signs of a slight increase due to positive developments in Vietnam's macro economy, in the last months of the year, the international financial market crisis caused investors to tend to withdraw capital back to the country to ensure liquidity of organizations in the home country.

The unpredictable fluctuations of the world and domestic economy and financial markets have negatively affected the balance of foreign currency supply and demand in the country. However, with the close direction of the Prime Minister and the close coordination of ministries and branches, the State Bank has flexibly managed exchange rates, achieved the objectives of the exchange rate policy, ensured foreign currency liquidity of the banking system, contributed to promoting exports, limiting trade deficit, curbing inflation and stabilizing the macro economy. One of the subjects most affected and most clearly affected by these positive moves of the Government is small and medium enterprises.

According to IMF statistics, by the end of 2007, VND had appreciated significantly against foreign currencies (up about 6% against USD). This was the result of too much capital inflow; the domestic credit boom and the alarming increase in trade deficit in 2007-2008 were inevitable consequences in that context.

Figure 6: USD/VND exchange rate developments from November 26, 2008 – January 23, 2009

Source: Business Forum, Master Le Van Hinh, which exchange rate policy, February 6, 2009

In 2008, Vietnam gradually adjusted the VND's value against the currencies of its trading partners (mainly the USD). In 2008, the State Bank of Vietnam repeatedly adjusted the VND/USD exchange rate in the direction of gradually devaluing the VND.

currencies of trading partners; estimated devaluation for the whole year is about 10%. Most recently, based on forecasts of the world and domestic economic situation in 2009, on December 25, 2008, the State Bank adjusted the average exchange rate on the interbank foreign exchange market to 16,989 VND/USD.

In early February 2009, the new exchange rate level was established: The average exchange rate on the interbank market is: 1 USD = 16,977.00 VND; and the USD buying and selling rate at common commercial banks is: 1 USD = 17,480/486 VND. The management agency expects that this level will contribute to supporting exports, reducing trade deficits and ensuring the tolerance of the international balance of payments; at the same time, limiting the expectation that the exchange rate will increase too quickly, creating conditions for businesses to proactively develop stable production and business plans. The actions of the State Bank are demonstrating that this agency is trying to continue to be proactive in adjusting the exchange rate in the above direction. Exchange rate is a complicated issue, adjusting the exchange rate does not mean devaluing the domestic currency, so that the domestic currency loses value as strongly as in other countries, but must increase or decrease flexibly depending on the specific direction of increasing exports or reducing imports. The State Bank should adjust in line with the trend of widening the band, so that commercial banks can adjust themselves to avoid losses. Devaluing VND to encourage exports, adjusting the exchange rate in the context of falling prices is a good opportunity to import essential materials and machinery, and another factor is to ensure the rights of enterprises that have to borrow in foreign currency. If the exchange rate is adjusted quickly, this group will suffer great losses. Currently, the VND/USD exchange rate is significantly different from many countries. Specifically, in 2008, the Thai currency depreciated against the USD by 16.1%, the corresponding rate of the Philippines was 15.3%, while the VND as of December 25, 2008 only depreciated by 9.5%. However, considering Vietnam's own circumstances, to adjust the exchange rate, the above factors must be ensured.

Currently, according to experts, VND is being valued higher than its real value because Vietnam's inflation is higher than that of its 17 major trading partners. Many experts believe that anchoring VND to USD causes imports to increase sharply, causing exports to suffer, while Vietnam needs to focus on boosting exports and limiting imports.

Usd/vnd Exchange Rate Developments During 11/26/2008 – 01/23/2009

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