Vietnam central bank to continue withdrawing excess cash as dong devaluates 4.4% year to date

The State Bank of Vietnam (SBV), the country’s central bank, will continue to issue treasury bills until the year-end to keep interbank interest rates on VND-denominated loans and the dong devaluation in permissible zones, analysts have said.

In October, the SBV net withdrew VND118.35 trillion ($4.83 billion) via open market operations (OMO). Outstanding 28-day T-bills once reached VND238 trillion ($9.7 billion) in the month after the SBV resumed this channel on September 21, according to data compiled by Vietcombank Securities Co. (VCBS).

Meanwhile, winning rates of T-bills climbed to 1.45% per year as of end-October. Interbank interest rates for overnight and one-month terms were 0.75% and 1.5% per year, respectively.

The Vietnamese dong weakened by another 1% against the U.S. dollar in October, resulting in a devaluation of 4.4% in the year to date.

Pressure on the USD/VND exchange rate is likely to persist in the final months of this year as major central banks, including the U.S.’s Fed and ECB, have maintained monetary tightening, VCBS said in its recent fixed income report.

The SBV is expected to continue being active on the OMO channel to curb excessive liquidity in the interbank market and ease the pressure on the forex rate, VCBS analysts said.

In the first week of November, the SBV net withdrew VND11.4 trillion ($465.3 million) via T-bill sales, compared to a net injection of VND48.25 trillion in the week ended October 27.

SBV Deputy Governor Dao Minh Tu recently highlighted the high correlation between interest rates and the USD/VND rate. If the spread between interest rates on the USD-denominated and VND-denominated loans widens, dollarization will appear and the forex rate could slip out of control.

The SBV will manage interest rates in line with movements of the USD/VND rate while ensuring credit access for businesses, Tu said.