Massive cash injection in Vietnam as exchange rate pressure eases

Vietnam’s central bank has pumped back a massive amount of cash into the economy as pressure on the USD/VND exchange rate has eased.

Earlier, on September 21, it had started re-issuing 28-day T-bills after a six-month hiatus amid liquidity abundance and interest rates on the interbank market hitting lows since early 2021.

The State Bank of Vietnam (SBV) stopped issuance again on November 9.

The reissuance of T-bills was aimed at raising interest rates on the VND-denominated loans and narrowing the spread with those of USD-denominated loans, thus helping curb a further VND devaluation.

In 35 consecutive days from September 21, the SBV withdrew VND360.35 trillion ($14.83 billion) from the system. The last batch worth VND5 trillion ($205.8 million) matured on December 6.

Since October 19, the maturity of the first batch, the regulator has injected back into the economy a net sum of VND256 trillion ($10.53 billion).

The large injection has helped prevent interbank interest rates from dipping further in recent weeks.

According to the latest SBV data, rates on overnight loans, which account for around 90% of total transactions in the interbank market, moved around 0.16% per year on December 4 – the same level as the cheap money period during pandemic times. Rates on one- and two-week loans dropped to the levels before the SBV’s T-bill issuance.

As the U.S. Fed ceased raising rates in its November gathering and U.S. inflation came in lower than expected, the DXY Index, which measures the greenback’s strength, dropped on November 15 and has moved sideways since. Its weakening has helped bring down the USD/VND exchange rate, giving the SBV more room to maintain its loosening policies.

Experts have observed that besides a massive injection due to T-bill maturities, liquidity in the banking system has remained ample thanks to tepid credit demand, although the peak season usually comes at the year-end.

According to SBV data, total outstanding loans of the system as of November 22 increased 8.21% from end-2022, much lower than the 14-15% goal set early this year. This left room for another 6% credit growth in the remainder of the year, or around VND730 trillion ($30 billion).

In a move to stimulate lending, the SBV raised credit quotas for banks that had fulfilled 80% of their credit growth ceilings and/or cut lending rates.

Late last week, Deputy Prime Minister Le Minh Khai ordered the Government Inspectorate to inspect the SBV’s credit growth management.