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Logo of Phnom Penh Post newspaper Phnom Penh Post - NBC to spend $6m to maintain value of riel

NBC to spend $6m to maintain value of riel

THE National Bank of Cambodia (NBC) has announced it will dip into its foreign reserves and buy US$6 million worth of Cambodian riels this week to hold up the value of the local currency, but an economist has warned that downward pressure will persist at least through the end of 2010.

In an announcement Friday, the central bank said it would take bids today, Wednesday and Friday at its Norodom Boulevard headquarters, putting up $2 million in US dollar holdings on each of the three days to buy riels.

Permitted bidders include commercial banks, licensed money changers and listed businesses.

NBC Director General Tal Nay Im said that because Cambodia was between harvests there was low demand for riels to buy agricultural produce, putting downward pressure on the value of the riel.

That pressure has been strong since the global financial crisis kicked in last year, she added, with plummeting business activity reducing demand for riels to pay workers.

The central bank intervenes regularly in the foreign exchange market to prop up the value of the riel. In early August it bought $2 million worth of riels daily for five days after the local currency hit a low of 4,191 against the greenback during the first week of the month.

The intervention had the desired effect, with a sharp appreciation to 4,116 on August 12 before the value edged back down to 4,136 to the dollar. It was at a similar rate last week.

"Given the small market for the riel, this sharp rebound clearly reflects the NBC's intervention," the Economist Intelligence Unit's (EIU) Cambodia economist Danny Richards told the Post earlier this month.

However, he also warned that downward pressure on the riel would continue and questioned how long the central bank could continue dipping into foreign reserves to prop up the local currency.

"The NBC will continue to intervene in foreign-exchange markets to prevent the riel from depreciating too quickly against the US dollar," he said by email. "However, its international reserves position will remain precarious. The US dollar is strengthening against major trading currencies, and given that there is still a lack of confidence in the riel, the dollar will remain the currency of choice in Cambodia for trade and investment."

In the EIU's August country outlook, Richards predicted that the riel would fall to 4,304 to the dollar by the end of 2010 as falling merchandise exports widened the current-account deficit from 9.6 percent of GDP in 2008 to 10.2 percent in 2009, putting downward pressure on the currency.

In a recent country risk service, the EIU also noted that Cambodia's real trade-weighted exchange rate had appreciated 20.3 percent over the past 48 months, "suggesting that the currency remains overvalued and thus vulnerable to a correction".

Tal Nay Im said that official exchange rates were determined by the NBC as an average of exchange rates at "five large markets in Phnom Penh".

The official exchange rate was always within 1 percent of market exchange rates, she added.

Canadia Bank Executive Vice President Dieter Billmeier said he expected the value of the riel to pick up against the US dollar and currencies in neighbouring countries between November and February because of the harvest season.

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