However, despite these measures, the USD/VND exchange rate has continued to exhibit significant fluctuations, and interest rates have shown an inclination to rise, particularly in the Government bond and interbank markets.
Fluctuating Exchange Rates
The exchange rate has displayed signs of upward momentum since July, following four reductions in operating interest rates by the SBV in 2023, while the U.S. Federal Reserve (Fed) has been raising interest rates. Furthermore, the excess Vietnamese dong (VND) liquidity, resulting from weak credit growth, has widened the interest rate differential between VND and USD in the interbank market, with VND interest rates remaining low and USD interest rates considerably higher. This pressure has intensified as the USD has gained strength in recent months.
According to a macro report released in September 2023 by Vietcombank Securities Company (VCBS), the USD's strength is expected to persist at a high level until at least November, owing to the correlation of global central bank monetary policies. Simultaneously, the State Bank continues to prioritize reducing lending interest rates, keeping the pressure on the exchange rate constant. In August and September, the VND depreciated by approximately 2.5% against the USD, resulting in a total decrease of around 3.5% since the year's outset.
As of October 11, the central exchange rate stood at 24,065 VND/USD, marking an increase of more than 1.9% compared to the beginning of the year. The USD/VND buying-selling exchange rate listed on Vietcombank's website was 24,220-24,590 VND/USD, signifying an increase of nearly 3.5%. Notably, the free-market exchange rate, after several weeks of limited movement, has surged in recent sessions, reaching 24,630-24,730 VND/USD on October 11, marking a rise of approximately 4% compared to the beginning of the year.
The message following the Fed's September 2023 meeting indicates that interest rates will remain elevated for an extended period. Combined with the expected soft landing of the U.S. economy, as suggested by the Fed's forecast scenario, the USD index has set new records. This development places emerging and developing markets like Vietnam under the dual pressures of inflation and exchange rates, with the devaluation of the dong still posing a significant challenge, as long as inflationary pressures remain in check.
In response to the Fed's meeting, the State Bank has been net-absorbing funds in the open market through T-bill issuances, causing T-bill interest rates to gradually increase through auctions, thereby leading to a hike in interbank interest rates.
Dr. Nguyễn Trí Hiếu, a banking expert, noted that the USD index on the global market has at times reached 106-107. If the DXY index were to rise to 110, Vietnam would face substantial difficulties. To mitigate exchange rate pressure, the State Bank of Vietnam has undertaken extensive bill issuances in a relatively short period as an immediate measure to swiftly adjust the current exchange rate, although it is not a long-term solution.
Implications for Interest Rates
In the most recent meeting, the Fed did not raise interest rates but adjusted its future plans. Consequently, there will be no short-term pressure on the VND/USD exchange rate. Over the past year, exchange rate adjustments in the region have not been excessively pronounced, with Vietnam's exchange rate adjustments falling within the regional average. However, when considering a 10-year period, the VND has experienced one of the lowest devaluations against the USD among regional currencies, highlighting that the VND does not conform to the trend of other regional currencies. Therefore, the recent VND fluctuations are unlikely a consequence of a regional currency depreciation trend, which might necessitate exchange rate adjustments to balance bilateral and multilateral trade.
Dr. Lê Đạt Chí from Ho Chi Minh City University of Economics offered an explanation for these fluctuations. He noted that the State Bank has been buying foreign currency to bolster foreign exchange reserves since the start of the year, corresponding to an amount of VND cash that would flow into the market. The State Bank has recently adjusted this cash amount by issuing bills, following a prolonged period of suspension and continuous issuance. The urgency behind this move lies in the need to maintain the 2023 exchange rate increase within an acceptable range. However, this margin is narrow, prompting the State Bank to quickly withdraw funds to make the necessary adjustments. The puzzling aspect is why the State Bank, which had been accumulating billions of dollars to boost foreign exchange reserves for many months, is now engaged in massive bill issuances. This has generated doubts, and cash flows seek refuge, with the exchange rate being one of the avenues, resulting in speculative activities that drive up exchange rates in the market.
Dr. Lê Đạt Chí further analyzed that as the year-end approaches, the room for increasing the USD/VND exchange rate during the year is nearly exhausted. Simultaneously, the State Bank is striving to maintain the exchange rate within an allowable range to achieve annual goals. Idle cash flows and an excess of VND in the market have fueled speculation on exchange rates, which is expected to yield profits sooner or later. Exchange rate speculation can prove profitable even in the presence of excess funds and can exert pressure on interest rates. Following the issuance of bills by the SBV, interest rates on government bonds and in the interbank market have recently increased. In light of these developments, commercial banks stand to benefit during the remaining months of the year.
To address these challenges, Dr. Lê Đạt Chí suggests reevaluating the management of exchange rate margins. Over the past 13 years, Vietnam has allowed the VND to depreciate by approximately 13% against the USD, while other currencies in the region have depreciated by nearly 30-40%. Despite having a strong economy characterized by a significant trade surplus, substantial foreign direct investment, and net foreign currency purchases, Vietnam has kept the exchange rate increase margin at a minimal level, believing it would stabilize the exchange rate. However, this approach has inadvertently allowed market forces to influence the exchange rate, compelling the State Bank to intervene. Attempting to keep the exchange rate increase margin low has consequently facilitated speculators' profiteering and compelled intervention through interest rate hikes and foreign currency sales.
