Vietnam wants to keep the interest rate to encourage production expansion

The State Bank of Vietnam (SBV) had to sell more than $2 billion last week. The move, as analysts commented, shows that foreign capital flow in the market is getting weaker.

Foreign portfolio investment is believed to be the major driving force which helped keep the dong/dollar exchange rate stable in 2017 and the first half of 2018.

However, US policies have prompted international investors to withdraw capital from emerging markets.

Analysts stressed that the rapid depreciation of the dong in recent days must not be entirely blamed on foreign capital flow or foreign currency supply-demand imbalance. This was mostly caused by the expectations of the national economy.

The expectations come from outside factors. The China-US trade war is likely to spread  and turn into a currency war. The US FED continues its policy on raising the interest rate which may last to 2019 and even to 2020. As a result, many currencies have depreciated sharply against the greenback.

Vietnam’s businesses fear that the fluctuations would have a big impact on the value of the dong in the future. And they have every reason to worry, based on the dong valuation by SBV on a basket of eight currencies, including Euro, Japanese JPY, Chinese CNY, Thai THB, Taiwanese TWD, Korean KRW, Singaporean SGD and US dollar.

To protect themselves, businesses have been implementing hedging operations by buying foreign currencies forward in order to satisfy demand for payment obligations in the future.

Interest rate under pressure 

The central bank’s sale of $2 billion means that VND46 trillion was withdrawn from the banking system last week. The interbank interest rate immediately soared by 2 percent over the week before.

In principle, the demand for cash in the national economy tends to increase rapidly toward the final months of the year. Therefore, dong withdrawal from circulation would affect banks’ liquidity. 

Meanwhile, the CPI (consumer price index) is under pressure to increase in upcoming months.

The interbank interest rate hike, plus the pressure on inflation, will both force commercial banks to raise the deposit interest rates to mobilize more capital.

VP Bank and Eximbank were the first banks to lift their deposit interest rates, though the increases were not that high.

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Thanh Lich