State Bank of Vietnam faces exchange rate pressures | Bank and finance
Exchange rate stabilization
On June 21, the State Bank of Vietnam reused the treasury bill channel after freezing it for two years, and in the past month issued a total of almost VND 400 trillion in bills. to remove the corresponding amount of Vietnamese dong. of the market. This decision took place in a context where the interest rate differential between the Vietnamese dong and the US dollar in the interbank market has been steadily decreasing, and was even negative at the end of May and the beginning of June, in particular at short term, causing the exchange rate to fluctuate sharply.
When the State Bank of Vietnam reopened the treasury bill channel, Mr. Pham Chi Quang, deputy director general in charge of the Department of Monetary Policy, said that the State Bank of Vietnam will increase the frequency of selling treasury bills. foreign currencies in order to be ready to more often supplement the supply of foreign currencies on the market and to help credit institutions respond fully and quickly to legitimate demand for foreign currencies.
According to comprehensive data from many organizations, from the beginning of the year until now, the State Bank of Vietnam has sold about 12 to 13 billion US dollars, or more than 11% of the foreign exchange reserve to the at the end of January. Especially in the second half of June, about US$2-3 billion was injected into the market by the State Bank of Vietnam to stabilize the exchange rate. The foreign exchange sales policy was also adjusted by the State Bank of Vietnam in early July, from three-month irrevocable forward sales to spot sales.
At the same time, the State Bank of Vietnam raised the purchase price of the US dollar to 23,400 VND, which means that the exchange rate of the US dollar and the Vietnamese dong increased by 2.5% per year. compared to the end of 2021. These actions would reduce the pressure on interest rates as well as manage the flow of foreign currency capital into the system. In recent sessions, the State Bank of Vietnam also sharply adjusted the central exchange rate from 20 VND to 30 VND, to closely follow the fluctuations of the US dollar in the international market.
During the first six months of the year, the US Federal Reserve (FED) moved from easing to tightening monetary policy and raised interest rates three times in a row. Optimistic forecasts for the US dollar and the Vietnamese dong exchange rate at the start of the year were quickly replaced by cautious forecasts after the FED raised interest rates by 0.75% on June 15, the biggest increase in 28 years, causing the dollar index (DXY) to soar, and at one point reach 109 points.
Therefore, over the past month, the State Bank of Vietnam has worked to stabilize the exchange rate in a stressed environment. Early results show that although the DXY index has risen almost 10% since the start of the year, creating increased pressure, the exchange rate of the US dollar and the Vietnamese dong have only increased by about 2% to 2.5%, which is quite low compared to other currencies in the region.
In theory, if inflation increases, the currency will depreciate. At the same time, a currency with a high interest rate will be stronger than a currency with a low interest rate. Against the background that Vietnam’s inflation rate in six months is only 2.44%, the inflation rate in the United States is 9.1%, and the interest rate of the Vietnamese dong is higher at the interest rate of the US dollar, because the Vietnamese dollar must appreciate against the United States. dollar.
However, in reality, the Vietnamese dong cannot be a market on its own. Rates must also rise to avoid US accusations of currency manipulation. Moreover, against the background of complicated movements in international markets, the demand for the US dollar increased when it was considered a safe currency. Vietnam also faces a trade balance deficit of nearly US$1.3 billion from the start of the year to June 15. Not only that, but the local currency will also come under further downward pressure as the FED is expected to continue raising interest rates in the second half of 2022.
This causes external pressure. Regarding internal pressure, Dr. Truong Van Phuoc, a member of the National Monetary Policy Advisory Council, pointed out that in Vietnam, there are 4 types of exchange rates which include central exchange rate, commercial exchange rate, the interbank exchange rate. , and the free market exchange rate. Currently, the State Bank of Vietnam can intervene on three kinds of exchange rate in the official market, while the exchange rate in the open market is difficult to intervene.
As noted by Saigon Investment, the black market exchange rate has risen sharply, especially when domestic and international gold prices permanently maintain a difference of 16 million VND to 19 million VND per tael. At the end of June, the exchange rate of the US dollar on the black market and the Vietnamese dong reached 23,940 VND for 1 USD, and on July 18, the price for buying and selling the US dollar on the black market was 24,520 VND to 24,670 VND for 1 USD.
Dr. Nguyen Tri Hieu, a bank finance expert, said the Vietnamese dong in the open market is depreciating very sharply. The black market rate is much higher than the official rate, which shows that the official exchange rate has not increased in line with market needs. This is a phenomenon to which public bodies must pay attention. Because when the black market price is much higher than the official price, it leads to currency speculation. Speculators will turn to the official market to buy the US dollar at a low price and resell it on the open market at a high price, which will be detrimental to the exchange rate policy and affect the functioning of the State Bank of the Vietnam.
However, raising the exchange rate according to the free market is difficult to do, as it is the job of the State Bank of Vietnam to stabilize the exchange rate to control inflation. If the exchange rate of the US dollar and the Vietnamese dong increases, import goods will become more expensive, which will stimulate import inflation. At the same time, the increase in the exchange rate of the US dollar and the Vietnamese dong will also increase the public debt if it is calculated in Vietnamese dong. This is a difficult situation for the operator.
Currently, Vietnam has some advantages in foreign exchange supply, such as relatively high foreign exchange reserves of about 14-15 weeks of import, with exports in the first six months increasing both in volume and in price. The World Bank (WB) ranks Vietnam 8th in the world and 3rd in the Asia-Pacific region in terms of remittances. Disbursed foreign direct investment (FDI) capital is expected to flow steadily.
But according to the latest report of the State Bank of Vietnam, in the week of July 4 to July 8, the average interest rate in the interbank market of Vietnamese dong in a few days, or 1 week, or 2 weeks, and 9 months is still lower than the average US dollar interest rate. The negative interbank interest rate difference between the US dollar and the Vietnamese dong will stimulate the demand for the purchase of US dollars which will continue to increase, which is an obstacle to the exchange rate of the US dollar and the Vietnamese dong.