Forex Reserves Keep Rising?

2:34:17 PM | 14/1/2019

At a recent press conference on monetary policy results in 2018, Deputy Governor of the State Bank of Vietnam (SBV) Nguyen Thi Hong said the SBV continued to buy foreign currencies to supplement State foreign exchange reserves.

In spite of revealing specific information, her remarks showed that foreign exchange reserves have kept rising in the past year. This is a very remarkable achievement and a huge success of the SBV amid foreign exchange pressures in 2018.

At the Government’s cabinet online videoconference with localities on July 2, 2018 in Hanoi, SBV Governor Le Minh Hung said that the SBV bought over US$11 billion net in the first six months to bring foreign exchange reserves to about US$63.5 billion. But, this was also the last time the market heard official information about foreign exchange reserves from this regulatory agency.

Meanwhile, the exchange rate in the domestic market started to stir up from late June 2018 when the U.S. dollar continuously appreciated in the world market as a result of the U.S. Federal Reserve (Fed)’s rake hike roadmap and the strong U.S. economic growth while Chinese yuan (CNY) plunged, resulting in mounting pressures on exchange rates in Vietnam.

Mr. Ngo Dang Khoa, Director of Treasury and Monetary Business at HSBC Vietnam, said, the Fed's tightening monetary policy and weaker CNY are the main challenges to the Vietnamese dong in the short term.
In fact, the domestic exchange rate has been under great pressure in the second half of 2018 and, to ease dong devaluation in the past year, the SBV had to sell foreign currencies to intervene in the market. According to the Research Department at Ho Chi Minh City Securities Corporation (HSC), the SBV sold about US$500 million only on August 3, 2018 to cool down the domestic forex market. Earlier, the central bank also injected US$1.97 billion from July 13 to 20, 2018. That meant foreign exchange reserves diminished.

However, the U.S. dollar is slightly depreciated after the Fed signaled to slow down its rate hike in 2019 and the US economy is also suffering from negative impacts from U.S.-China trade war. Taking advantage of this chance, the SBV gradually eased accumulative pressures on exchange rate in the past year and bought in foreign currencies.

Thus, on the one hand, the SBV continuously revised its central exchange rate to gradually narrow the gap with regional currencies, especially CNY, because a slight devaluation of the U.S. dollar against Vietnamese dong in the last year caused the latter to overvalue against the former. Although the central exchange rate was revised down by VND2 to VND22,827 per dollar today, it was still VND77 higher than in late November.

However, the exchange rate on the market did not follow SBV instructions but continuously went down instead. Currently, banks are buying the greenback for VND22,140 - 22,160 and selling it for VND22,240 - 22,250, down up to VND120 from late November because the foreign currency supply in the economy is abundant when the country took a trade surplus of over US$7 billion, FDI disbursement also rose 9.1% to US$19.1 billion and equity investment reached US$9.89 billion.

Taking this opportunity, the SBV took a reasonable step - raising the bid price of foreign currency by VND50 to VND23,200 per dollar right on the first trading day of 2019 (January 2). Remarking on this move, a banking expert said, this is an arrow aiming at two targets. Firstly, the SBV sent a signal that it does not want the market-based exchange rate to fall further because it will make VND overvalued to regional peers, which is detrimental to exports. Secondly, the SBV took advantage of plentiful supply of foreign currencies to buy in more.

According to statistics from the National Financial Supervisory Commission (NFSC), although the dollar bore zero interest rate, the greenback deposits still increased 17%, eight times higher than in 2017 and foreign currency deposits accounted for 9.9% of the total deposits mobilized.

Mr. Le Xuan Nghia, former Vice Chairman of NFSC, said, these figures show that companies are hoarding foreign currencies instead of using them to do business. “This shows that they are also very cautious in keeping their foreign currency liquidity, revealing their concerns that the exchange rate may increase. This factor needs to be taken into account by the SBV to regulate the market in 2019,” he recommended.
Experts also pointed out that if this reality is marginalized, the State forex reserves may rise even higher. To do so, the prerequisite is to keep macro stability and curb inflation.

H.A