LAST YEAR'S EXCHANGE RATE BATTLE IS UNLIKELY TO RECUR, AS THE STATE BANK OF VIETNAM (SBV) IS IN A MUCH MORE PROACTIVE POSITION THIS YEAR

The rising USD Index has caused significant depreciation among many Asian currencies. (Source: VNDirect)

According to Mr. Nguyen The Minh, Director of Personal Client Analysis at Yuanta Securities Vietnam, compared to Asia and Southeast Asia, the Vietnamese đồng (VND) has experienced relatively low depreciation, losing value only slightly more than the Singapore dollar and the Indonesian rupiah. Currently, the Philippine peso has depreciated by approximately 1.8% year-to-date, the Thai baht by 3.2%, the Chinese yuan by 5.1%, and the Malaysian ringgit by 6.3%.

However, Mr. Minh notes two factors that suggest potential risks for exchange rates:

1. U.S. inflation not decreasing as expected by the Federal Reserve (Fed).
2. The rapid increase in the USD Index, which has now reached approximately 105 points, could significantly impact Vietnam's exchange rate.

U.S. data indicates that the Fed's goal of reducing inflation to 2% is unlikely to be achieved soon. As a result, the Fed plans to raise interest rates again in November this year and reduce rates only twice in 2024.

Mr. Minh stated that while the Fed's November rate hike is not surprising, the plan to cut rates just twice in 2024 has caught the market off guard and contradicts earlier forecasts.

Since March 2022, the Fed has implemented over 10 rate hikes to reach peak interest rates by the end of this year. With inflation under control, experts had expected significant rate cuts in 2024.

Therefore, it is certain that the exchange rate may continue to heat up in the coming period, especially when the Fed officially raises rates in November. A sharp increase in the exchange rate will heighten debt obligations, particularly for the private sector, and raise the cost of imported raw materials and consumer goods, thereby adding to domestic inflationary pressures.

The State Bank of Vietnam (SBV) is currently in a proactive position

Although exchange rate risks exist, the SBV is well-prepared. Dr. Can Van Luc, a member of the National Financial and Monetary Policy Advisory Council, stated that while the Fed’s anticipated rate hike in November may cause some exchange rate fluctuations, the impact will likely be moderate as the market has already factored it in.

Unlike last year, this year the State Bank of Vietnam (SBV) has taken a proactive stance and is well-prepared, minimizing the element of surprise. Dr. Luc noted that in 2022, the Fed’s aggressive rate hikes, paired with Vietnam’s decision not to raise rates, led to significant exchange rate volatility. However, with the Fed now nearing the end of its rate hike cycle, the SBV has anticipated and implemented preventive measures.

Additionally, this year’s context is different: the banking system is stable, the current account surplus is strong, with a trade surplus of around $20 billion, and foreign direct investment (FDI) inflows have shown positive signs in recent months.

Experts from VNDirect Securities also highlighted several factors supporting exchange rate stability, including:

• Sustained high trade surplus.
• Positive trends in FDI and remittance inflows.
• Anticipated foreign currency inflows from share sales to foreign investors in the second half of 2023.

Maintaining exchange rate fluctuations within a manageable range of under 3% helps mitigate negative impacts while enhancing the competitiveness of Vietnam’s exports. A moderate depreciation of the VND against the USD is also unlikely to trigger significant capital outflows from Vietnam.

However, the SBV is expected to pause reductions in policy interest rates at least until the first half of 2024. This is necessary to balance macroeconomic stability and growth objectives amid rising pressures from exchange rates and inflation.

Dr. Can Van Luc, member of the National Financial and Monetary Policy Advisory Council. (Source: NVCC).

With the SBV's move to absorb nearly 10,000 billion VND through the issuance of treasury bills, experts suggest that this is just one solution in the context of excess liquidity.

"With abundant liquidity, the SBV purchases, thereby supporting a slight increase in interbank interest rates, but not significantly. This also indirectly supports the exchange rate, but without much impact," said experts. They emphasized that this is a normal operation for the SBV, and whether it continues to issue treasury bills will depend on the liquidity situation of the banks.

Experts also pointed out that compared to the net absorption via treasury bills in February and March, which reached hundreds of thousands of billions, 10,000 billion VND is not a large amount. Moreover, with 17 banks participating in the auction and two banks winning, it shows that liquidity is currently very abundant. This is considered a reasonable policy in the current context to avoid excessive liquidity that could lead to inflation in the economy.