The foreign exchange (forex) reserves of Vietnam currently reach 63.5 billion USD and are forecasted to rise strongly in the near future. This is considered a “buffer zone” for the economy to avoid external shocks.
According to the State Bank of Vietnam, over the past two years, the agency has bought an addition of 32 billion USD to supplement its forex reserves.
The forex reserves will continue to increase
In early 2018, SBV started to buy foreign currency on three-month term in order to regulate more flexibly. Accordingly, the amount of dong (VND) injection has been stretched and overlapped when contracts due, instead of piling up as before. Since the start of this activity, it is estimated that 40 percent of the foreign currency acquired by SBV is term purchase.
Can Van Luc, finance and banking expert said that this result shows that the activity and new products offered by SBV have actively been welcomed by market members. Along with the move to loosen the pressure of injecting VND to buy USD like before, at the time of purchase, the SBV still actively used tools to partly withdraw VND and regulate capital in the system in order to balance the related factors such as interest rates, exchange rates and minimise the pressure on inflation.
In addition to the foreign capital that is attracted from foreign direct investment (FDI) and other sources, according to banking expert Dr Nguyen Tri Hieu, the capital contribution via share purchase of foreign investors with total capital value of 2.26 billion USD has also increased Vietnam’s forex reserves in the recent time. These numbers are likely to further rise when the deals to buy shares of foreign investors seem to continue. Recently, Vietnam Technological and Commercial Joint Stock Bank (Techcombank) sold 164 million shares, equivalent to 14.1 percent of charter capital, to foreign investors at 128,000 dong per share. Accordingly, the bank expected to earn 922 million USD in this offering.
Meanwhile, other offers of banks to foreign investors are being planned and expected to start from the second quarter of 2018. At its recent Annual general Meeting (AGM), Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV) has submitted shareholders for approval of the plan to issue over 603.3 million shares to foreign investors. If the issuance is successful, at the current price, this is also expected to be a billion dollar deal.
Ensuring financial safety and liquidity
The clearest impact of the increase of forex reserves is to ensure the national financial safety and liquidity in many aspects. Firstly, the government actively ensures the foreign debt repayment when the foreign debts of Vietnam account for a significant proportion in the Gross Domestic Product (GDP, 45 percent) and the ratio of debt repayment on total state budget revenue is fairly high at about 20 percent.
Secondly, the forex reserves guarantee a safe level when comparing to the import size in weeks of imports. If based on the value of Vietnam’s imports of goods in 2017 which was 211.1 billion USD, the forex reserves of Vietnam until now are equivalent to about 15 weeks of imports considered safe enough for the present time.
Thirdly, the increase of forex reserves will create the conditions for SBV to actively intervene in the forex market when there are abnormal fluctuations in the context of Vietnam’s high openness.
Fourthly, the forex reserves rise will help consolidate Vietnam’s position in the international arena. This is the basis for international rating agencies to consider upgrading the Vietnam’s finance and currency market, facilitating Vietnam to issue bonds on the international market.
Lastly, the forex reserves will help raise the position of VND, contributing to control inflation, stabilise exchange rates and minimise the goldenisation and dollarisation.
According to Dr Le Dang Doanh, the size of forex reserves is one of the important indicators for economies, especially developing countries like Vietnam. If a country has a low level of forex reserves, there will be negative impact on the country’s international payment capability as well as monetary and financial security. In reverse, if the forex reserves are too large, it will incur costs of holding forex reserves, as the profit from investing forex reserves is often lower than the cost of foreign borrowings.
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