Over the last few years, foreign exchange reserves in Vietnam have continually and steadily been increasing. This source has now become a stable buffer for the State Bank of Vietnam (SBV) to manage the exchange rate, especially during the last two crucial years under the ongoing Covid-19 pandemic.

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At a recent seminar, Dr. Nguyen Xuan Thanh, Fulbright University in Vietnam, referred to the foreign exchange reserves in Vietnam and said that compared with countries in the high middle income regions such as Thailand, the Philippines, and Indonesia, were deeply affected during the last two years of the Covid-19 pandemic, but Vietnam had not felt the need to use its foreign exchange reserves to support the economy or fight the pandemic. Besides this fact, he said that during this crucial time, the State Bank of Vietnam has also added large amounts of foreign currency to its existing foreign exchange reserves.

In 2019, when the Covid-19 pandemic had not yet appeared, the amount of foreign exchange purchased by SBV was about USD 20 bn, bringing foreign exchange reserves to nearly USD 80 bn, equivalent to 3.8 months of imports and about 6% of GDP. By 2020, this rate was still maintained. Foreign exchange reserves increased by USD 21 bn and reached USD 100 bn, equivalent to four months of imports. By 2021, because Vietnam had to prove to the US that the country was not a currency manipulator, the SBV suddenly changed its policy on the last trading day of the year, from spot buying USD to buying for delivery for six months with cancellation. This slowed down the increase of foreign exchange reserves in general, especially for the US dollar.

 

In April, the US confirmed that Vietnam was not a currency manipulator and the State Bank of Vietnam was able to adjust its policy, returning to buying foreign currencies for immediate delivery after June. This development caused foreign exchange reserves of the country to set new records. The November macro report of BIDV Securities Company (BSC) said that the value of Vietnam's foreign exchange reserves reached USD 107 bn, the highest ever, and increased by VND 2 bn compared to USD 105 bn in October.

Buying a large amount of foreign currency means that the SBV has to pump a large amount of money into the economy. Statistics of SSI securities company show that in August, the State Bank of Vietnam injected nearly VND 120,000 bn through the foreign currency maturity channel. After returning to buying foreign currency on spot, in the first three weeks of November, the amount of Vietnam dong injected into the market through the foreign currency buying channel from commercial banks amounted to more than USD 60,000 bn.

 

Under normal conditions, when buying a lot of foreign currencies, injecting a lot of Vietnamese dong into the market without proper regulation of cash flow creates pressure on the money supply and becomes a potential risk for inflation, although low inflation in 2021 supported the policy of the State Bank of Vietnam. At the same time, the SBV move did not put pressure on the economy. System liquidity is ensured in the context that deposits from the residential area prolong the downtrend. Interbank interest rates for key terms overnight, one week and two weeks, have always remained below 1% per year, even at a time when credit is on the rise.

 

 

Buffer for exchange rate

 

Foreign exchange reserves increased sharply during the pandemic thanks to favorable factors such as goods trade balance with a surplus of USD 225 mn in 11 months; and realized Foreign Direct Investment (FDI) in 11 months estimated at USD 17.1 bn. The amount of remittances flowing to Vietnam are also a record high, for instance for Ho Chi Minh City alone, remittances in 11 months were estimated at USD 6.2 bn. The sharp increase in foreign exchange reserves helped Vietnam improve its position in the world, meet its debt repayment capacity, strengthen the national credit rating, and attract foreign investments. Domestically, foreign exchange reserves increased sharply, helping increase people's confidence in the Vietnam dong and opening up new capital resources by converting US dollar to Vietnam dong for production and business investment.

 

In addition, the State Bank of Vietnam can be proactive in managing the exchange rate, responding to fluctuations in the market. For example, the US dollar and Vietnam dong exchange rate has extended its downward slide from the beginning of the year to middle of November, then suddenly fluctuated sharply in the last one month. If on 12 November, the exchange rate at commercial banks dropped to VND 22,645 per USD, the lowest since 2017, then it is currently trading at VND 23,145 per USD, equivalent to an increase of 2.2%. In recent sessions, the exchange rate at commercial banks increased to VND 270, re-establishing the mark of VND 23,000 per USD.

 

Even so, the volatility was quite overwhelming. By 8 December, the selling price of USD by commercial banks had cooled down to VND 23,185 or VND 23,200 per USD, due to the intervention of the State Bank of Vietnam. Specifically, the selling price of USD at the State Bank of Vietnam Exchange on 8 December was adjusted down by VND 706, from VND 23,856 per USD to VND 23,150 per USD, while the buying price remained at VND 22,650 per USD. This reflects the market willingness to create supply at low price.

 

Compared to previous years, this time the State Bank of Vietnam intervened very quickly mainly because of the solid reserve buffer. The exchange rate at commercial banks has continued to cling firmly to over VND 23,000 so far, due to the increased demand for foreign currency to import goods at the end of the year. The State Bank of Vietnam continues to maintain the selling price of VND 23,150 per USD to meet market demand. Therefore, the Vietnamese dong is one of the few currencies that has appreciated against the US dollar this year. As of 3 December, the Vietnam dong is gaining 1.32% compared to the end of 2020, while the Dollar Index is up 6.78%.

 

However, this advantage may face challenges when the trend of economies is to narrow monetary policy and adjust interest rates. Specifically, in 2022, with the possibility that the US dollar will continue to increase because the Fed will stop injecting money and start to raise interest rates, it will put pressure on the Vietnam dong to depreciate again. At that time, although foreign exchange reserves are high, in order not to allow the Vietnam dong to depreciate, banks will have to adjust interest rates.

Do Linh