In 2018, the State Bank of Vietnam (SBV) purchased more than six billion US dollars. In January 2019 alone, the agency purchased an addition of four billion US dollars and is said to continue buying foreign currency in February.
At the government online conference with localities on July 2nd 2018, the SBV’s Governor Le Minh Hung said that in the first six months of 2018, the SBV net purchased more than 11 billion US dollars, raising the foreign exchange (forex) reserves to 63.5 billion US dollars.
At the conference of the banking sector held on January 9th 2019, as of late 2018, Governor Hung shared that the SBV net purchased more than six billion US dollars but did not mention the forex reserves figure. It is known that, by the end of 2018, the SBV sold about six to billion US dollars for market intervention.
After the tension of the forex market in late 2018, the market was stable in January 2019. The dong/US dollar exchange rate levelled off, mostly being closed to the buying rate of the SBV and closed at 23,195 dong per US dollar, similar to the level in late 2018. Most of the factors supported the stability of exchange rate, especially when the SBV actively adjusted the policies from the beginning of the year.
From 2016, when officially applying the central exchange rate mechanism, the SBV has tended to adjust the buying exchange rate in order to expand the forex reserves and direct the exchange rate in the beginning of the New Year. However, right in the first trading session of 2019, the SBV raised buying rate by 500 points to 23,200 dong per US dollar.
Talking to Dau tu Chung khoan, Currency director of a foreign bank said that this move helped the SBV purchase more than four billion US dollars in January, significantly supplementing the country’s forex reserves (estimated to be over 60 billion US dollars).
“With the stability of exchange rate, commercial banks have cancelled the buying forward transaction carried out previously in November 2018. The estimated cancelling value was about one billion US dollars”, said a senior leader of Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV).
In addition to the initiative of the SBV, the supply and demand of foreign currencies were maintained smoothly. The foreign currency supply was abundant and much larger than demand, seen through the large amount of foreign currency withdrawn by the SBV.
Moreover, the basic components of the balance of payments were all positive. According to statistics of the general Department of Customs, the trade balance of goods in January 2019 was in a surplus of 0.82 billion US dollars, up by 4.5 times. The disbursement of Foreign Direct Investment (FDI) was 1.55 billion US dollars, up by 48 percent. The remittances strongly increased according to seasonal factor before the Lunar New Year holiday, estimated at 1.5 2.0 billion US dollars, up by 50-60 percent compared to the same period of 2018.
“Meanwhile, the indirect investments recorded a notable deal from Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank) with an estimated value of nearly 300 million US dollars. On the stock market, the investment sentiment became more optimistic when foreign investors net purchased about 50-100 million US dollars. It is estimated that the basic supply and demand difference of the economy reached up to 3.8 4.0 billion US dollars, leaning toward the supply,” said the leader of BIDV.
On the other hand, the international environment also supported the exchange rate stability in January 2019. An analysis of BIDV’s research team said that contrary to the upward trend in 2018, the US dollar Index (DXY) fell by 0.6 percent in the context when the US Federal Reserve (Fed) kept the interest rates unchanged and showed a more patient attitude when making the decision to tighten monetary policy in 2019. The closure of the US government in a record long time due to budget issue conflicts between the two parties also made investors worried about the strength of the US dollar.
The US-China trade ward has shown more positive signs when both sides expressed their willingness to resolve conflicts through high-level trade negotiations. Although no specific agreement has been made, positive signals have gradually appeared, contributing to the Chinese yuan’s recovery of 2.6 percent against the US dollar and bringing the US dollar/Chinese yuan exchange rate to the lowest level in the last six months.
The four billion US dollars purchased by the SBV in the first month of 2019 showed the stability of the US dollar/dong in January with supports from the SBV’s management policies and the fairly abundant foreign currency supply and demand of the economy. The stability of the US dollar/dong exchange rate was maintained in February, with a range of 23,200 23,230 dong per US dollar.
The SBV has not planned any major change to the management policy. Accordingly, the SBV is expected to continue the orientation to stably operate the forex market with reasonable changes, in line with the macroeconomic context and international market developments.
The international forex market is forecasted to have dramatic changes with two outstanding events in February including the next movements of the US-China trade war and the Brexit negotiations. While the possibility of not meeting the Brexit agreement between the US and EU is growing, the outcome of the trade war is still unknown. Both the US and China are trying to negotiate to reach an agreement ahead of the US deadline to raise tax rate (expected on March 1st 2019). However, the possibility of a change in result is not high, as the differences between the two sides are still large.
Economic experts analysed that it is likely that the US will postpone the deadline to the tax imposition with China for two to three months for the two sides to reach a sustainable agreement. In addition, the postponement of the tax rate raise will help the US have more time to assess the internal economy, in the context when the risk of a slowdown is gradually seen. If this happens, the DXY may level off around 95 97 points, and the US dollar/Chinese yuan will fluctuate around 6.7-6.8 yuan per US dollar.
The notable point is that the basic foreign currency supply and demand of the economy is fairly balanced. In the previous years, February was not the month to record abundant supply of foreign currency and strongly rising foreign currency demand. In terms of foreign currency supply, it is expected that the trade balance will see a deficit of 300-400 million US dollars in the context when the export of phone components is showing signs of deceleration.
The FDI disbursement is expected at 0.8 one billion US dollars, when no signs of large mergers and acquisitions (M&A) deals and divestments have been seen. In terms of foreign currency demand, the foreign currency buying forward to prevent risks of exchange rate has not increased dramatically after the Lunar New Year holiday, in the context of the fairly stable exchange rate.
“The fairly balanced foreign currency supply and demand in February will be one of the basis for the SBV to continue to buy foreign currencies to increase forex reserves,” said a senior leader of the SBV.
