The State Bank 'stands in front of the gun' when Vietnam goes against the world?

There have been concerns that the State Bank of Vietnam (SBV) is "standing in front of the gun" when cutting interest rates drastically while the US Federal Reserve (Fed) and many central banks around the world still policy caution.

There is also concern that the SBV's opposite direction with the Fed and global regulators can pressure the exchange rate, and the VND will weaken.

However, these concerns have yet to materialize, and the State Bank is still doing a very good job of managing monetary policy, stabilizing exchange rates, and supporting Vietnam's macroeconomic growth.

"Standing in front of the gun."

Until now, observers still pay attention to why the USD/VND exchange rate has remained stable even though the State Bank of Vietnam (SBV) has continuously reduced the operating interest rate, going against the world trend.

The operator's continuous reduction in operating interest rates has caused the interbank overnight interest rate to drop sharply from 4% to nearly 0%.

Thereby further widening the gap between the interbank overnight interest rate in Vietnam and the Fed's federal funds rate (currently at around 5.3%).

In an analysis report just released, Maybank Securities (MBKE) said there are concerns that the State Bank of Vietnam (SBV) is "standing in front of the gun" when cutting interest rates drastically despite the Federal Reserve. The US state (Fed) remains cautious.

At the same time, the contrast in policies between the Fed and the SBV may put pressure on the exchange rate.

According to Maybank Securities, the USD/VND exchange rate was mostly flat in the first 7 months of this year after the State Bank of Vietnam lowered interest rates 4 times, totaling from 1.25 percentage points to 1.5 percentage points.

While Vietnam tried to "hold the reins" so that interest rates would not increase hotly, at the same time, the Fed also tightened 4 times, raising interest rates by 1 percentage point.

Why is the exchange rate stable?

The reason why the exchange rate has remained stable, according to MBKE's analysis block, is because Vietnam's trade surplus reached 15 billion USD in the first 7 months of 2023.

In addition, Vietnam also has a brighter economic outlook in the second half of 2023 and into 2024, according to many reports, analyses and forecasts.

Analysts of Maybank Securities also forecast that the Vietnamese dong (VND) will depreciate by 2-3% against the USD in the next 12 months.

However, this, according to MBKE, does not affect the government's policy stance and economic recovery.

Previously, as Sputnik reported, giving a forecast for the second half of 2023, VNDirect Securities pointed out many factors that could put pressure on the VND exchange rate.

The first is that the interest rate gap between VND and USD continues to narrow as the Fed's operating interest rate can remain at the peak until the end of 2023 to curb inflation, while the State Bank orients to continue lowering interest rates to support growth support.

Second, domestic inflation may increase from the end of the third quarter 2023. However, VNDirect believes that the VND exchange rate this year will be better supported than in the second half of 2022 because the trade surplus remains high (in the first 7 months of 2023, Vietnam has a trade surplus of 16.5 billion USD, more than 16.5 billion USD, more than 12 times the same period in 2022).

In addition, stable FDI and remittances also support Vietnam a lot. At the same time, the agreements to sell shares to foreign investors expected to be implemented in the second half of 2023 will increase the supply of foreign currency. Vietnam currently maintains high real interest rates.

All under control

In the newly published strategy report, Viet Rong Securities (VDSC) said that the exchange rate has fluctuated since cutting the operating interest rate in May 2023.

At the same time, the capital inflow caused the interbank overnight interest rate to drop sharply from 4% to nearly 0%.

According to VDSC, this development widens the gap between the interbank overnight interest rate in Vietnam and the Fed federal funds rate (currently at around 5.3%).

Regarding the exchange rate, in the coming time, VDSC believes that exchange rate fluctuations are still under the control of the State Bank.

This, according to VDSC, is due to drivers such as imports falling more sharply than exports (-17.1% in the first 7 months of 2023), causing the trade balance to increase to a record high (USD 15.23 billion) as well as the number of remittances transferred to Ho Chi Minh City increased sharply in the first 6 months of 2023 to reach $4.3 billion, up 37% over the same period.

In addition, the supply and demand for foreign currency are less tight than in the second half of 2023. The SBV bought over 6.3 billion USD (equivalent to 148 trillion dong) in the first 6 months of 2023.

Tactic

Recently, Shinhan Bank also warned of the risk of VND devaluation in the third quarter and recommended the State Bank not to cut interest rates too sharply due to weak exports, some weak banks and reduced foreign exchange reserves.

The USD/VND exchange rate is expected to be under upward pressure in the short term due to slowing global demand, lower-than-expected indicators of the Chinese economy and a weakening renminbi.

Recommending tactics to increase the effectiveness of the State Bank's policy management, Maybank Securities believes that Vietnamese regulators can use measures such as stricter control over foreign exchange activities of commercial banks. (NHTM), slightly tightened the liquidity of VND in the interbank market and sold USD from foreign exchange reserves to protect VND.

MBKE noted that the first measure is often the first move of the SBV to use gas with unusual fluctuations in the foreign exchange market.

Along with that, MBKE pointed out that although the price of rice has risen to a record level in a decade, thanks to a series of favorable factors, inflation will also be under the control of Vietnam.

Analysts expect domestic interest rates to drop another 1-1.5 percentage points soon and the possibility that the SBV will cut policy rates by 25 bps to promote the economy's recovery.

As Sputnik reported in a recent statement, SBV Deputy Governor Dao Minh Tu said, with conditions, that the State Bank will continue to lower the operating interest rate. Otherwise, commercial banks will strive to reduce lending rates based on cost reduction.

However, the Deputy Governor noted that more than reducing interest rates is needed to increase credit growth. The representative of the State Bank is frank, and monetary policy is not a magic wand. This tool cannot fully rely on the opening of capital needs of the economy.

In operating monetary policy, the SBV will try to use flexibly the tools in the hands of the bank, but it is necessary to harmonize many factors because if you only look at the short-term, you will suffer medium and long-term consequences. Therefore, other policies are needed.

Also read: Limited monetary policy options » Vietnam News - Latest Updates and World Insights | Vietreader.com