Why is SBV constantly raising central exchange rate?

19-Jan-2019 Intellasia | Dien dan Doanh nghiep | 6:00 AM Print This Post

Compared to the end of November 2018, the central exchange rate has been raised by the State Bank of Vietnam (SBV) by 100 dong, equivalent to an increase of about 0.44 percent.

In the morning of January 15th, the SBV suddently increased the reference exchange rate by up to 13 dong to 22,850 dong per US dollar and continued to raise it by seven dong to 22,857 dong per US dollar. This move of the SBV is surprising because it was made in the context when the US dollar in the world market is weakening due to the expectation that the US Federal Reserve (Fed) may stop increasing interest rates this year as the US and global economy are showing signs of slowdown. The surprise is even bigger when the reference rate adjustments are the strongest in recent months, and even higher than the adjustments made when the exchange rate was under much pressure.

In general, the reference exchange rate has been continuously raised since the beginning of December 2018 until now, but the past adjustments were insignificant, just around two to three dong, and maximum five dong per US dollar, except the adjustment this time.

Meanwhile, the US dollar in the world market during this time depreciated by nearly 1.9 percent. The current US dollar Index is only around 95.5 points. The exchange rates at banks have also fallen fairly sharply. The US dollar selling rate is currently ranging around 23,240 23,250 dong per US dollar, while the buying rate is around 23,140 23,160 dong per US dollar, both down by 130 dong per US dollar compared to the end of November 2018.

According to experts, the SBV’s move to raise the reference exchange rate is to neutralise the pressure accumulated last year and to narrow the gap with regional currencies. Indeed, the domestic exchange rate has been kept relatively stable in 2018. For the whole year, the dong only declined by abut 1.8 percent against the US dollar while many other emerging currencies in the region depreciated fairly strongly, and the Chinese yuan also lost up to five percent of value.

That reality on one hand has made the dong to be overvalued against many other currencies in the region, particularly against the Chinese yuan, thereby negatively affecting export activities. On the other hand, the price to pay for maintaining exchange rate stability is also very high, which is the rise of dong interest rates, while the SBV had to sell foreign currency to intervene in many tomes.

“This time is a good opportunity for the SBV to resolve these pressures,” said a banking expert. He explained that firstly, as the US dollar is on a downtrend, the SBV’s adjustment of reference exchange rate does not create psychological effect, while achieving double effect. Secondly, as the inflation in the domestic remains low and petrol prices are declining, this move also does not put pressure on inflation.

Regarding the fairly strong decline of exchange rate in the market in recent time, according to this expert, is due to the abundant foreign currency supply thanks to the record high trade surplus of 6.89 billion US dollar in 2018, the disbursement of Foreign Direct Investment (FDI) of 19.1 billion US dollars, the strong inflows of remittances, etc.

The SBV has also taken this opportunity to boost foreign currency buying in order to increase the national foreign exchange reserves.

According to experts, this move aims at several targets at the same time. Firstly, the SBV sent an operating signal that the agency did not want the exchange rate in the market to further drop because it would negatively influence exports. Secondly, the SBV also took the advantage to increase foreign exchange reserves. Thirdly, this move also aimed to support liquidity for banks during the Lunar New Year season.

The first target has been achieved when the exchange rate in the market has stopped falling and maintained a stable trend from the last week until now. The second target is also progressing smoothly as according to a source of information, the SBV has net bought over 1.3 billion US dollars.

This information is completely grounded as the SBV net withdrew nearly 46.8 trillion dong in the first week of 2019, according to Bao Viet Securities Company (BVSC). That is an unusual move of the operator as the system’s liquidity is often fairly tense in the time before the Lunar New Year. Such move can only be explained as to avoid putting pressure on inflation, as the purchase of 1.3 billion US dollars also means that over 30 trillion dong were injected into the market.

At the conference on deploying tasks in 2019 of the banking sector which was held on January 9th, the SBV’s Governor Le Minh Hung said that in 2018, the SBV net purchased over six billion US dollars and on two days of January 7th and 8th, the SBV continued to net purchase a large amount of foreign currency to increase foreign exchange reserves.

Looking further in 2019, the SBV aims to continue regulating interest rates and exchange rate in line with macro balances, market developments, and monetary policy objectives; at the same time synchronously combining monetary policy instruments and foreign exchange market intervention measures when necessary to stabilise the foreign currency market.

 


Category: Finance, Vietnam

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