Dong and US dollar interest rates gap around safe level of 2pct

15-Sep-2018 Intellasia | NDH | 6:00 AM Print This Post

Looking back on the money market in August, in a recent released report, SSI Retail Research reported that the interbank rates and exchange rates have been gradually stabilised. However, the interest rate fluctuations in the Tier-1 market are quite obvious due to the tightening of bank liquidity.

Taking prudent steps

According to the analysis of Saigon Securities Incorporation (SSI), money market activities in August showed very cautious steps of the State Bank of Vietnam (SBV).

In the interbank market, overnight rates were pushed up from two percent to four percent and maintained at this level from mid-August. Meanwhile, US dollar interest rates remained stable around the two percent benchmark, helping to create a quite safe gap of two percent. Thus, SBV has actively rose dong interest rates to avoid large gap between US dollar and dong interest rates which causes pressure on the exchange rate.

To reach this target rate, SBV has been very flexible in using the instruments of open market operation (OMO) to regulate liquidity.

According to statistics of SSI Retail Research, besides the 28-day and 91-day bills still being issued like before, since the beginning of August, SBV extended the tenor range to include 7-day, 14-day and long tenor of 140-day bills which due in the last week of 2018. The volume of bills issued in the first two weeks of the month reached over 52 trillion dong, of which the volume of 140-day bills alone was 28.960 trillion dong.

The issuance of long tenor bills led to a relatively large amount of money being retained, and then SBV supported market liquidity using OMO. In the last three weeks of the month, a total of 36.355 trillion dong of OMO was offered with the tenor of seven days and the interest rate of 4.75 percent. By the end of August, the difference in the volume of bills and OMO remained relatively stable around 70 trillion dong.

SSI Retail Research said that the money market has temporarily found a new balance. The supply in the market is enough for the members to regulate by themselves with little intervention from SBV.

However, tightening liquidity has reflected more clearly on the Tier-1 market. The mobilising interest rates increased not only in joint stock commercial banks but also in some State-owned commercial banks.

Interest rates increased at all tenors, in which the 12-month tenor had the biggest increase since banks need to prepare capital for the end of the year peak, especially when the portion of short-term capital used for medium and long term loans will be reduced from 45 percent to 40 percent since 2019.

In the bond market, yields tend to rise sharply for short tenors. In particular, one-year and two-year tenor yields rose by more than 0.5 percent from the beginning of the year and reached the highest level in a year, trading at 4.13 percent and 4.31 percent respectively by the end of August. Meanwhile, yields for long tenors like 10-year and 15-years decreased slightly compared to the beginning of the year. The yield curve continued to be less steep, reflecting the increasing short-term risk.

Credit, exchange rates gradually stabilised

Besides the prudent steps in money market, SBV is also cautious in managing credit growth. Directive No. 04/CT-NHNN on implementing the tasks and solutions of the banking sector shows that SBV will not adjust the credit growth target of banks in 2018.

According to SSI Retail Research, this is a measure to stabilise liquidity, control inflation and, more importantly, direct credit flows into effective targets.

Statistics from the general Statistical Office imply that the sector’s credit growth in the first eight months was estimated at 8.18 percent. This is the lowest level in four years when it was 10.8 percent in 2017, 9.64 percent in 2016 and 10.21 percent in 2015. It is likely that actual credit growth in 2018 will be lower than the target of 17 percent.

Similar to the stable movements of interest rates, banks’ exchange rate rates in August only fluctuated around the benchmark of 23,270 dong/US dollar for buying rate, and 23,350 dong/US dollar for selling rate, up 0.17 percent compared with the level at the end of July. Central rate was adjusted not so much.

Looking at the movements in the unofficial market, the US dollar rose sharply in early August to a peak of 23,650 dong per US dollar and cooled down to 23,480-23,500 dong/US dollar.


Category: Finance, Vietnam

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