Banks' liquidity is getting tight

Interest rate rising sharply

The General Statistics Office’s (GSO) report shows that the total money supply (M2) in the first six months of 2018 increased more rapidly than credit growth.

By June 20, 2018, the credit growth rate of the entire banking system had reached 6.35 percent compared with the end of 2017, or VND413 trillion. 

Meanwhile, the M2 had reached 7.96 percent, or VND652 trillion. The figures showed that banks had abundant cash.

However, a lot of ‘strange’ things have happened recently in tier-2 market, where transactions among commercial banks, and between commercial banks and the State Bank occur.

Over the last six weeks, the interbank interest rate has been fluctuating. Since the beginning of August, the interbank interest rate has been hovering around the high level of 4.5 percent per annum.

The fact that the interbank interest rate has remained high over many consecutive weeks reflects the tight liquidity of the banking system, according to Bao Viet Securities (BVSC).

BVSC’s research team affirmed that tension in the interbank market has begun influencing the tier-1 market. The deposit interest rates applied by commercial banks are rising, especially for 6-12 month term deposits. Ban Viet, SHB, Techcombank and Vietbank, for example, have raised interest rates by 0.1-0.3 percent.

Money being withdrawn

What has caused the tight liquidity of the banking system in the last two months, which was quite contrary to the abundance in the first six months of the year?

The State Bank does not update data about the credit and M2 growth rates monthly. However, BVSC noted that the M2 growth has slowed down in the last two months.

The M2 increased sharply in the first six months of the year as a result of the State Bank’s purchase of foreign currencies.

The forex reserves by early May 2018 had reached $63 billion, increasing by $11 billion over the end of 2017. As such, in the first five months of the year, the central bank pumped a large amount of money, estimated at VND250 trillion, to buy $11 billion.

Also according to BVSC, from July 30 to August 28, 2018, the State Bank withdrew VND23.687 trillion through OMO and bonds. 

Meanwhile, the dong has not been pumped into circulation to buy foreign currencies since the beginning of Q3. The State Bank even had to sell $2 billion to ease the dong/dollar exchange rate tense, which means that VND46 trillion was withdrawn from circulation.

Analysts commented that SBV’s policy has two purposes – curbing inflation and easing pressure on the exchange rate.

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