Foreign exchange swap 

Deom December 4 to 9, the State Bank of Vietnam (SBV) twice performed foreign exchange swap (FX Swap) operations. Most recently, on December 9, the regulator conducted a 14-day FX swap with credit institutions, buying USD spot and selling USD forward at VND23,948-23,958 per dollar.

The maximum volume in this intervention session was $500 million.

Prior to that, SBV held a similar swap on December 5, also with a $500 million limit and a 14-day term at VND23,945-23,955/$ (spot buy - forward sell).

This means that banks "temporarily exchange" USD for VND for 14 days, then swap back at a cost of about 1.1 percent/year. This tool helps cool down VND tension and swap costs during the year-end peak.

The $500 million scale in the first session was seen as a test of market reaction. Meanwhile, the SBV’s decision to open another $500 million swap indicates that the tool has proven effective. The regulator may fully expand the volume or repeat similar swap sessions in the near future.

According to Pham Chi Quang, Director of the Monetary Policy Department at the SBV, implementing FX swap transactions with credit institutions aims to stabilize the monetary market and meet liquidity demand, especially toward year-end, alongside liquidity provision through open market operations (OMO).

The move came amid a sharp rise in liquidity demand, with interbank interest rates surging above 7 percent, the highest level in the past three years.

SBV’s latest report showed that in the first week of December the central bank injected a net VND35,317 trillion via the OMO channel. As of December 4, overnight, one-week, and two-week interbank rates stood at 6.88 percent, 6.92 percent, and 7.22 percent per year, respectively. Interbank interest rates remained elevated throughout the past week.

Liquidity surplus here, shortage there

After staying at low levels for the past two years, deposit interest rates have begun to edge up again, most clearly among private commercial banks.

Commenting on recent developments in deposit and interbank interest rates, SHS Securities said that, in essence, rising rates are the result of recent localized liquidity problem: some banks have excess liquidity while others still face shortages. This forces some banks to compete by raising interest rates, creating a race among lenders even though overall system liquidity is not weak.

Behind the scenes, debt restructuring over recent years and maintaining low-yield, long-term assets have reduced net interest margins. Banks must increase long-term deposits to 'patch' the maturity mismatch between long-term loans and short-term deposits, accepting higher interest to ensure liquidity safety, according to SHS.

A key point to watch is that by the end of this year, the regulation allowing 20 percent of State Treasury deposits at the Big4 banks (Agribank, Vietcombank, Vietinbank, BIDV) to be included in the loan-to-deposit ratio (LDR) will expire. If this issue is not addressed in time, the market could easily face renewed bottlenecks from large banks.

The gap between credit growth and deposit rates is about 4.5 percentage points. However, this gap is covered by other channels like certificates of deposit, bond issuances, State Treasury funds, and the fact that revolving credit flows eventually return as deposits at some bank.

In other words, the current gap reflects a change in funding structure rather than a shortage of actual system-wide liquidity.

Therefore, SHS believes that closely monitoring these supplementary channels, especially State Treasury cash flows and the degree of reliance on short-term funding, will be the decisive factors in assessing liquidity risks in the coming period.

According to Nguyen Ba Hung, Chief Economist for Vietnam at the Asian Development Bank (ADB), to accelerate lending, banks have to increase charter capital.

“Only with sufficient capital can banks enhance their ability to withstand risks. If credit expands without a corresponding increase in capital, while income faces downward pressure, risks will rise,” he noted.

Explaining the recent rise in interbank and deposit interest rates, the ADB expert said the main causes are liquidity factors and market practices. However, liquidity decrase has occurred only locally.

"Only banks lacking capital must borrow on the interbank market. In my view, the current rate increase is structural. When a bank wants a sudden spike in credit growth, it must push up deposit rates to fund loans. Conversely, if they could issue stocks or bonds more easily, they wouldn't face such pressure on deposits," Hung said.

Tuan Nguyen