Exchange rate is being considered as a good point in the regulation of monetary policy of the State Bank of Vietnam (SBV). Though the State Bank has gradually tightened foreign currency credit, in fact, foreign currency credit is rising again.
Exchange rate regulation is one of the biggest advantages of the current monetary policy. However, foreign currency credit is showing signs of rising, contrarrying the direction on gradual tightening of foreign currency credit against the dollarisation of the State Bank.
Specifically, in 2017, foreign currency credit increased six times from the previous year. Meanwhile, in Q1/2018, according to the data of the National Financial Supervisory Commission (NFSC), credit in dong only swelled 3.3 percent, while credit in foreign currencies rose as much as 5.4 percent. Regarding proportion, foreign currency credit accounted for 8.1 percent of the total credit, compared to 7.9 percent in 2018.
Reportedly, at the beginning of this year, the State Bank had a document on continued expansion for businesses to borrow foreign currencies till the end of 2018.
Economic expert Le Xuan Nghia said with the characteristics of Vietnam economy, the dollarisation ratio at less than 10 percent is acceptable.
Regarding the aforementioned issue, Dr Nguyen Kim Anh, deputy Governor of the State Bank said the lending in foreign currency, along with the stabilisation of exchange rate, supported export businesses to stabilise production and business, reduce prices, thereby enhancing competitiveness.
However, the State Bank leader also said in the near future, the State Bank will continue gradually narrowing foreign currency, shifting from foreign currency mobilisation-lending to foreign currency buying-selling in line with the market situation.
“Credit organisations and businesses need to be active in balancing business plans to adapt to the gradual narrowing of some foreign currency borrowing demand to meet with the government’s policy on limitation of dollarisation”, recommended the deputy Governor.
Despite some fluctuations, exchange rate in the first half of this year was generally stable, the listed exchange rate at banks only rose more than 0.2 percent, despite large fluctuations in the global financial market.
According to experts, in this year, exchange rate will continue being supported by abundant supply (divestment of state businesses, positively increased FDI, continued trade surplus etc.). Besides, the State Bank’s central exchange rate regulation policy continued to show effectiveness.
Pham Thanh Ha, Head of the Monetary Policy Department of the State Bank said over the last few years, the central exchange rate was flexibly regulated, combining synchronously monetary policy tools, limiting the speculation and hoarding of foreign currencies. Thanks to which, the State Bank continuously purchased a great deal of foreign currency to raise the foreign currency reserves to the highest level ever.
The stable exchange rate policy in several recent years strengthened the confidence of investors, while helping the National foreign currency reserve to quickly increase (reaching more than $63 billion, the highest level ever).
With this huge reserve, the ability to keep the exchange rate market’s stability is within the reach of the State Bank. However, deputy Governor of the State Bank Nguyen Kim Anh said the foreign currency and exchange rate markets still have certain hidden risks.
First, Vietnam’s trade and finance balance surplus depends largely on FDI sector as well as opinions of foreign investors in Vietnam’s economic background and their reactions against domestic and foreign markets.
Second, Fed and central banks of large economies may narrow monetary policy faster than market expectations, which may put psychological pressure on the market.
Third, trade protectionism and trade conflict risks in case of escalation between China and the U.S may negatively affect international trade as well as global growth, thereby adversely influencing on foreign currency market and exchange rate.
Another difficulty is that the injection of too much money to buy foreign currency reserves needs measures to neutralise capital flows, avoiding inflation. In several recent months, the State Bank purchased foreign currencies following three-month term, reducing the pressure of injecting too much dong to the market at a time. Therefore, the capital absorption of the market is still poor, and the State Bank needs to closely monitor and has measures to withdraw money to avoid causing inflation.
