Currency Intervention Intervention – What’s Next?

With the current foreign exchange reserves being less than sufficient, covering only approximately three months of imports, and having declined by more than 22.7 billion USD in 2022 due to interventions to stabilize the market, the solution of selling foreign currency to stabilize the market is clearly not sustainable in the long term.

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The State Bank is implementing measures to increase the supply of US dollars and gold bars to the market, to reduce pressure on the foreign exchange market. Photo: T.L.

A Psychological Therapy?

In recent times, there was a market where the buying price of US dollars on the free market increased sharply by 160 dong, to the highest level ever recorded at 25,680 dong. Meanwhile, the selling price also jumped by 90 dong to 25,760 dong, which is also a new record. Compared to the beginning of this year, the US dollar price on the free market has increased by 3.9% for buying and 4% for selling. On the official market, the quoted buying and selling prices of US dollars by banks have increased even more, with an increase of 4.5% compared to the beginning of the year.

In response to the continued rise in exchange rate pressure, the State Bank of Vietnam (SBV) on April 19, 2024, officially announced additional measures to intervene in the market by reopening the channel for selling foreign currency. Specifically, the SBV will sell foreign currency spot to credit institutions with negative foreign currency status and which have a demand for purchasing foreign currency from the SBV. However, the selling price of the SBV Exchange Office quoted at the same time was 25,450 dong/USD, which is much higher than the buying price quoted by banks. Therefore, it is not surprising that there are reports indicating that no bank has registered to buy. In addition to the reason that the foreign exchange status of the banks is positive, it is clear that banks still benefit more if they buy from residents and economic organizations.

It should also be noted that the supply of foreign exchange flowing into the country has been abundant over the past period. After the overall balance of payments in 2023 recorded a surplus of over 56 billion USD, the first quarter of 2024 continued to witness a trade surplus of 5.75 billion USD; the value of capital contributions and share purchases by foreign investors reached nearly 6.17 billion USD, an increase of 13.4% over the same period; foreign direct investment disbursed reached 4.63 billion USD, an increase of 7.1% over the same period. Regarding remittances, the amount of remittances transferred to Ho Chi Minh City in the first quarter of 2024 alone reached nearly 2.87 billion USD, an increase of 35.4% over the same period and the highest growth rate in the first quarter in the past three years.

Despite losing value against the US dollar, when compared to other currencies, the dong is still rising in value, which has more or less affected the competitiveness of Vietnamese export enterprises compared to their major trading partners.

However, analysts also point out that the demand for foreign currency has increased strongly in recent times. In addition to the recovering import demand, the outflow of foreign currency capital from Vietnam, both officially and unofficially, is also likely to be significant, in a context where the interest rate differential between the US dollar and the domestic currency in Vietnam (and other countries) has widened since the US Federal Reserve (Fed) has continuously raised interest rates over the past two years. It is noteworthy that the possibility of the Fed maintaining high interest rates for longer than expected further stimulates the transfer of foreign currency capital to places that offer better profitability.

In particular, the large and sustained difference between the converted world gold price and the domestic gold price has also been one of the factors putting pressure on the exchange rate, as it increases the demand for purchasing foreign currency to illegally import gold.

What’s Next?

Thus, after the issuance of credit notes from mid-March to date to absorb the excess dong liquidity in the system, and then the plan to change the basis for determining the term exchange rate between the US dollar and the dong in term transactions to be more flexible through the Draft Circular amending and supplementing Circular 02/2021/TT-NHNN, the SBV is implementing measures to increase the supply of US dollars and gold bars to the market, to reduce pressure on the foreign exchange market.

However, with the current foreign exchange reserves not being ample, only approximately three months of imports, when before – in 2022 they decreased by more than 22.7 billion USD also because they had to be sold to intervene in the market, the solution of selling foreign currency to stabilize the market clearly cannot be long-term. In a recent assessment, a representative of the Asian Development Bank (ADB) said that the current exchange rate trend is in line with the general trend and is within the SBV’s range, so it is not necessary to use foreign currency to intervene.

With the US dollar unexpectedly rising again from the beginning of this year as the Fed expects to keep the US dollar base interest rate high for longer, many other currencies have also witnessed a depreciation against the US dollar. Specifically, the USD Index has increased by 3.8% since the beginning of the year; the euro has depreciated by 2.8%, the pound sterling has fallen by more than 3.1%, most notably the Japanese yen has fallen by more than 9.7%, the Swiss franc has fallen by 8.3%, the Australian dollar and the Korean won have both fallen by more than 5% against the US dollar. Countries in the Asian region have also witnessed their domestic currencies face heavy depreciation pressure against the US dollar. This is the general trend.

Regarding the SBV’s exchange rate range, from mid-April banks have started to quote the selling price close to the SBV’s ceiling, calculated at a margin of ±5% of the central exchange rate. Meanwhile, the US dollar price on the free market has exceeded the central bank’s ceiling since the end of February. This is one of the reasons forcing the SBV to continuously increase the central exchange rate from mid-April to date, with an increase of 190 dong in just eight sessions from April 15 to April 22.

In this context, there have been comments suggesting that the next step for the SBV may be to raise the operating interest rate again, to increase the attractiveness of the dong, thereby reducing the demand for foreign currency speculation. However, this move does not seem to be really necessary in the current situation. Firstly, the deposit interest rate with a term of less than six months of most banks is still far from the ceiling of 4.75%, in a context where many banks still have excess capital when the economy’s capacity to absorb capital is still weak. It is only when the interest rate level really faces upward pressure and wants to exceed the ceiling that the interest rate adjustment needs to be considered.

Instead, the regulator should probably accept a certain degree of depreciation of the dong as an inevitable trend that cannot be avoided in the current context. In fact, despite losing value against the US dollar, when compared to other currencies, the dong is still rising in value, which has more or less affected the competitiveness of Vietnamese export enterprises compared to their major trading partners.

Specifically, if we look at the cross exchange rate of the dong with some foreign currencies updated from the SBV website, the dong has appreciated by 2.4% against the euro, 6.3% against the Japanese yen, 4.6% against the Australian dollar, 5.2% against the Thai baht, 5.1% against the Korean won, 3.4% against the Taiwan dollar, 7.6% against the Brazilian real, 3.9% against the Indonesian rupiah, 1.9% against the Malaysian ringgit and 1.6% against the Singapore dollar.

Trieu Minh

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