Vietnam forex reserves down to $87 bln, within safety threshold

The State Bank of Vietnam (SBV) has sold about $22 billion from its foreign exchange reserves so far this year, bringing it down to about $87 billion.

Brokerage firm ACB Securities (ACBS) says the selling equals 21% of the reserves in 2021; and that Vietnam’s forex reserves are now equivalent to 12 weeks of imports, still "within the safety threshold".

The central bank’s USD exchange rate closed October at VND23,695 (+1.3%) and the average figure at commercial banks increased 4.09% to VND24,838 due to growing pressure from the U.S. Federal Reserve's (Fed) rate hikes. The free market exchange rate at one point rose to a record VND25,325 per dollar

In order to ease the pressures, the SBV widened the USD/VND daily trading band from 3% to 5% on October 17. Then it increased the USD selling price two times, from VND23,925 to VND24,870.

As the dollar rose, global gold prices dropped sharply by 1.8% in October, ending the month at $1,636 per ounce. Meanwhile, domestic gold prices increased 0.9% to VND67 million ($2,700) per tael, or about 37% higher than the global price.

Besides, the SBV continuously pumped VND into the banking system via reverse repos and matured treasury bills to cool down the interest rate hike. From October 18, the central bank refrained from pumping the domestic currency, issued seven-day bills to withdraw VND from the system, and raised the interest rate by 100 basis points on October 25 as it continued to respond to exchange rate pressures.

As a result, the central bank net injected VND37,000 billion ($1.47 billion) into the banking system last month via treasury bills, reverse repos and USD sales.

However, it would be difficult for the SBV to maintain low interest rates as the prospect of the Fed raising interest rates would pressure the exchange rate, ACBS analysts stressed.

They also said that the new credit growth limit at the beginning of 2023 along with the high demand for cash during major holidays next year may make liquidity dry up and pressurize banks to increase their interest rates at the beginning of next year.

At the moment, the SBV is not expected to hike interest rates any more this year. However, the analysts noted that if central banks of other nations make any "hawkish" moves at the end of the year, the SBV will likely respond by raising interest rates by 0.5 percentage points at the end of the year.

Additionally, the SBV will strive to maintain the positive difference between the interbank interest rate in VND and USD, which can make the domestic currency more attractive and partly relieve pressures to increase the USD/VND exchange rate.