In spite of the strong US dollar (USD) appreciation on the world market, the domestic exchange rate has been falling slightly due to the abundant supply of foreign currency. The depreciation of USD in the domestic has helped the State Bank of Vietnam (SBV) to reduce costs while continuing to buy foreign currency in order to raise foreign exchange reserves. However, the appreciation of dong (VND) may lower the competitiveness of exports.
The USD on the world market has increased fairly sharply thanks to the higher US Treasury bond yield, amid the fears of the rising US government debt supply and the inflationary pressure due to the increasing oil prices. Particularly, the greenback recorded the strongest weekly gain since November 2016 in the last week, bringing the USD index to 91.71 points the highest level since January 12th 2018.
Nevertheless, the exchange rate on the domestic market has been decreasing continuously in recent sessions, even though SBV has continuously increased the reference exchange rate. In particular, compared to April 13th, the reference exchange rate has increased by up to 47 dong per USD. In the same time, the exchange rate at banks has fallen by about 25 dong per USD. The current USD selling price of banks is popular at 22,800 dong per USD, while the buying price is about 22,710 22,730 dong per USD.
Explaining the decline of the domestic exchange rate, the Research Team of BIDV’s Capital and Monetary Business Division pointed out some reasons.
Firstly, the foreign currency supply has continued to be supplemented in large volume, while the demand for foreign currency has been kept fairly stable. The difference between supply and demand is estimated at about 500 million USD, inclining towards supply. In addition to the positive import-export data in the first half of April with trade surplus of about 360 million USD as announced by the general Department of Vietnam Customs, the most notable cash flow in the past week was the transaction worth 1.3 billion USD of Vinhomes and GIC investment fund from Singapore.
Secondly, the interest rate difference between VND and USD has tended to be slightly expanded as the VND interest rates increased in all terms, while USD interest rates remained almost unchanged. By reference to VNIBOR, the interest rate differences from overnight term to three-month term was negative 0.38 percent and negative 0.33 percent (increasing from negative 0.93 percent and negative.03 percent in the previous week). During the week, the VND interest rates increased by about 40-60 points across the terms, leading to higher costs in holding USD.
Dr Nguyen Tri Hieu, an economic expert also believed that SBV currently has many tools to stabilise the foreign exchange market. In addition, since the agency is holding abundant reserves to regulate the exchange rate, the USD price in the domestic remains stable although it has fluctuated in the world.
Concern about the decline in competitiveness of exports
Sharing with Dau tu Chung khoan, a senior leader of SBV said that the changes in the fiscal and monetary policies in big countries, especially the interest rate hike of the US Federal Reserve (Fed) and the implementation of the tax reform programme by the US government may put negative impact on the capital inflows and outflows, thereby affecting the exchange rate and interest rates in Vietnam. Accordingly, the trend of raising interest rates in the world will create the pressure to increase USD interest rate in the domestic, leading to the pressure on the VND interest rate level in order to ensure the interests of holding VND.
The above SBV’s leader added that “The Fed’s trend of increasing interest rates will still has an impact on the USD-VND interest rate difference and cause psychological impact, leading to difficulties and challenges for the management of monetary policy in order to stabilise the exchange rate and foreign exchange market of the SBV”.
Many financial experts believed that the excessive foreign currency supply and the depreciation of the exchange rate in local market has facilitated the SBV to buy a huge amount of foreign currency in order to increase the national foreign exchange reserves. BIDV’s research team estimated the current foreign exchange reserves at about 63-64 billion USD, about 1-2 billion USD higher than the number announced by SBV in February 2018.
However, many people concerned that the exchange rate decline in the domestic while the USD is appreciating on the world market has by chance caused the VND to appreciate against the currencies of many big trading partners of Vietnam. This is not positive to export.
In the past years, SBV repeatedly raised the USD buying price when the domestic exchange rate recorded similar fluctuations to the current time. That sign showed that the management agency wanted to stop the decline of the exchange rate in the market, in order to avoid adverse impact on the export. After such moves, the exchange rate on the market increased again, more closely with the changes of the USD movements on the world market.
