In the context of the State Bank of Vietnam (SBV) reducing interest rates, there will be many favourable factors contributing to the exchange rate stability in the near future.
Last week, SBV announced a 25-point reduction in operating interest rates since September 16, 2019.
According to the analysis of individual customer division, SSI Securities Corporation (SSI Retail Research), that SBV lowered interest rates would create many favourable factors, stabilising the exchange rate in the near future. As follows:
– Firstly, after two large foreign currency purchases in the first four months of 2019 and from July until now, foreign exchange reserves were then at the highest level ever, estimated by SSI Retail Research at about $70 billion.
– Secondly, the trade balance and foreign investment flows were going smoothly. The trade balance in August 2019 had a surplus of $3.43 billion, which was the highest monthly surplus in recent years, accumulated for eight months of 2019, the trade balance had a surplus of $5.1 billion. The registered and disbursed FDI capital still increased steadily, by the end of August 2019, there was $11.96 billion of disbursed FDI capital, rising 6.3 percent over the same period in 2018. Indirect investment flows were also quite positive with the big sale of equity stocks of VCB, VIC, VCM, etc. and international loans from Vinmec, VPB and so on. The overall balance was in surplus of $9.1 billion in the first six months of 2019.
– Thirdly, some large capital flows might flow in the near future such as Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV)’s capital sale and remittance season in late 2019.
Besides, CPI to August 2019 increased by 1.87 percent compared to the beginning of the year and increased by 2.57 percent over the same period last year. SSI Retail Research estimated that was a relatively low level compared to the target of controlling inflation of about four percent in 2019 set by the National Assembly. Therefore, SBV had a basis to direct the operating policies to the goal of reducing interest rates.
Also, SSI Retail Research stated that, in the short term, interest rates on interbank market and government bond yields of short-term bonds on the secondary were the two most affected entities from Open Market Operations (OMO) rate adjustment. Evidently, on the day of receiving the information on reducing interest rates, overnight interest rates on the interbank had dropped sharply to 2.78 percent per year (down 20 points), yields of government bonds one to three years decreased from 6 to 12 points to around 2.6 percent per year.
In a longer-term, the interest rates on the interbank market will range from treasury bills to OMO rates (from 2.75 percent per year to 4.5 percent per year). In the ideal conditions, cheaper cost of capital in the interbank market (and the liquidity environment was expected to be abundant) would create a basis for commercial banks to adjust reducing interest rates on the market one (i.e. the market between commercial banks and economic organisations and individuals).
