Vietnam sells $2.8 bln forex, may raise policy rates to curb VND slide: broker

The State Bank of Vietnam (SBV), the country’s central bank, has sold some $2.8 billion worth of foreign currency out of its $102 billion reserve fund since April 19 to prevent the Vietnamese dong from sliding further, according to a brokerage house.

During May, the SBV has sold $2.4 billion worth of hard currency to local commercial banks, more than six times the sale of $380 million in April, Maybank Securities Limited Company (MSVN) said in a note.

Despite this intervention and a decrease of the U.S. Dollar Index (DXY), upward pressure on the Vietnamese dong (VND) has not shown signs of easing. The USD sell rate at state-controlled Vietcombank has been constantly touching the upper bound of the daily permissible range of the USD/VND exchange rate since late April.

The VND has lost some 4.5% against the U.S. dollar since the start of this year, becoming the second-worst performer in Southeast Asian, above only the Thai baht, data of MSVN showed.

MSVN reckoned that the SBV will not let the VND devalue “too much.” An overdone devaluation of the VND may push inflation to rise beyond the target of 4.5%, undermining purchasing power of households and burden businesses with higher costs. In addition, a strong VND devaluation would result in higher costs for foreign-invested firms that rely heavily on imported materials.

MSVN, therefore, forecast the SBV to raise its policy interest rates by 50 basis points (bps) in the coming weeks. The SBV may take a wait-and-see stance to gauge the possible impacts of rate increases on the USD/VND exchange rate before deciding whether to make the move.

To mitigate the impacts of higher interest rates on the economy, the government may keep lending interest rates at low levels through loan packages for priority sectors, including real estate, MSVN said.

In addition, fiscal measures such as tax holidays and extension of a two-percentage-point value-added tax cut until December this year may give some help, the brokerage added.

The SBV cut its policy rates by a combined 125 bps last year to support economic growth, despite the U.S. Fed continuing monetary tightening.

The banking regulator elevated the interest rates for open market operation (OMO) financing and Treasury bills last week to curb the VND’s slide. The OMO interest rate climbed 25 bps to 4.5% per annum, the second increase over the past month.

The SBV lowered its central reference USD/VND rate by VND12 to 24,256 on Tuesday. Vietcombank decreased its quote by VND13 to VND25,238-25,468 a dollar by bids and asks, respectively.