Vietnam central bank may continue cash withdrawal to keep forex rate stable

The State Bank of Vietnam (SBV), the country’s central bank, is expected to continue withdrawing cash from the banking system through open market operations (OMO) in order to narrow the dong-dollar interest rate gap and keep the USD/VND rate stable, analysts have said.

The SBV on Wednesday sold VND20 trillion ($816 million) worth of 28-day treasury bills, with a winning rate of 0.65% per annum, higher than the 0.58% on Tuesday and 0.49% on Monday.

The banking regulator has withdrawn a total of nearly VND70 trillion ($2.87 billion) over the past five days, all by selling 28-day bills.

The consecutive withdrawals are aimed to regulate liquidity on the tier-2 (interbank) market in order to ease speculative pressure in the short term. Meanwhile, the volume has been moderate to avoid liquidity constraints in the tier-2 market and minimize upward pressure on tier-1 (between banks and businesses/individual clients) interest rates, according to analysts.

Researchers at FIDT, an investment advisory and asset management firm in Ho Chi Minh City, said the withdrawals are meant to balance the labor market and inflation, while supporting economic growth.

The SBV is trying to keep the USD/VND at around VND24,500 by raising short-term interest rates to dampen forex rate speculation. Selling SBV-bills is a wise move, FIDT researchers commented.

They predicted the SBV to pull out up to VND100 trillion ($4.1 billion) within two weeks, leaving excess liquidity at between VND40 trillion and VND70 trillion ($2.87 billion), equivalent to the required reserves across the whole banking system.

Analysts at Viet Dragon Securities Co. (VDSC) said the recent successful SBV-bill issuances and low interbank rates signaled excess liquidity in the system.

With an interest rate gap between USD- and VND-denominated loans of less-than-one-month terms hovering around four or five percentage points, carry trade operations are expected to continue as the U.S. Federal Reserve (Fed) is set to further monetary tightening, they said.

The recent bill sales after the latest Fed policy meeting are meant to discourage carry trade and ease the pressure on the USD/VND rate.

The SBV may continue cash withdrawals but it does not mean a reversal in its monetary policy, VDSC analysts said.

The SBV on Wednesday raised its mid-point exchange rate by VND4 from a day earlier to VND24,088 per U.S. dollar. Meanwhile, prices of the greenback at a number of commercial banks dropped by VND15-20.