Foreign currency reserves at record high, exchange rates stable

Exchange rate stability

Le Minh Hung, governor of the State Bank of Vietnam (SBV), said since the beginning of the year, the SBV has managed monetary policy in a flexible manner in order to help the country control inflation, maintain macroeconomic stability, stabilize the foreign exchange market, support economic growth and ensure the security of credit institutions. Credit recorded a high growth in the first nine months of the year, while foreign exchange reserves hit a record high of US$45 billion, roughly US$6 billion more than at the end of last year.

Earlier this year, experts warned that the exchange rates would be under pressure and might increase by two-three percent due to US Federal Reserve (Fed) rate hikes. However, Can Van Luc, a finance and banking expert, said the exchange rates have to date only increased by one percent, and could increase by 1.5 percent for the whole year. At the same time, the rate in the unofficial market declined by 1.5-1.7 percent.

On October 10, for the first time ever, the SBV decreased the buying rate of the US dollar.

The buying price for the greenback at the central bank’s head transactions office on October 10 was quoted at VND22,720 per US dollar, down VND5 from the fixed price set at the end of June and VND20 below the upper limit of VND23,121. This was the first time the central bank has made such a move since it initiated a new fixing mechanism for the USD/VND rate in January 2016. Since the start of this year, the bank has raised the buying price three times.

Another source of growing foreign currency are remittances from Vietnamese living abroad, which are forecast to grow 5-7 percent to exceed US$14 billion this year, taking Vietnam to the top 15 countries with the biggest remittances, said Can Van Luc.

FDI inflows, futures buys

According to the SBV’s Credit Department, by the end of September 2017, foreign currency banking transactions had increased 4.3 percent compared to the end of 2016, reflecting the stability of the foreign exchange market and raising depositor confidence. In addition, the 5-6 percent difference between the Vietnamese dong and US dollar deposit interest rates has been an incentive for depositors to hold more Vietnamese dong.

The record foreign currency reserves stem not only from savings and remittances, but also from FDI inflows. By October 20, the sum total of registered capital from new projects, additional funding and investment in the form of capital contribution and share purchasing reached US$28.24 billion, an increase of 37.4 percent compared to the same period in 2016.

In a further bid to increase foreign currency supplies, the SBV used futures trading tools to buy foreign currencies and reduced its buying price for the greenback for three consecutive sessions. With futures trading tools, commercial banks can sell foreign currency to the central bank in the future at the current price, without worrying about prices going down later. The central bank’s purchase has also created more choice for commercial banks so that they can be more active in balancing foreign currency flow and capital demand.

Associate Professor Nguyen Thi Mui, a member of the National Financial and Monetary Policy Advisory Council, highly appreciated the adjustments in the SBV’s exchange rate policy for helping reduce inflationary pressure at year-end when the money supply is high.