Illiustrative image (Photo: diendandoanhnghiep.vn) According to the Maybank Securities Company (MBKE), there were concerns thatthe SBV would face big challenges when cutting interest rates drastically whilethe Fed has still maintained a cautious policy. The contrast in policies betweenthe Fed and the SBV could put pressure on the exchange rate.
However, the concern has not materialised and the USD/VND exchange rate hasstayed stable so far. The rate was mostly unchanged in the first seven monthsof this year after the SBV lowered interest rates four times, totaling from1.25 percentage points to 1.5 percentage points for discount and refinancingrates. At that time, the Fed tightened the rates four times, raising interestrates by 1 percentage point.
MBKE analysts attributed the stability of the exchange rate to Vietnam’s tradesurplus of 15 billion USD in the first seven months of 2023 and a brightereconomic outlook in the second half of 2023 and in 2024.
In the short term, the Government is giving more priority to economic recovery.Therefore, MBKE believes the SBV will continue to maintain the loose monetarypolicy.
Under this context, MBKE suggests a number of measures that the SBV can use tostabilise the exchange rate. First, the central bank should further tighten thecontrol of foreign exchange activities of commercial banks. Secondly, it shouldtighten a bit of Vietnamese dong liquidityin the interbank market. Finally, the SBV can sell US dollars from the nation’sforeign exchange reserves to protect the dong.
According to the analysts, the first measure was usually the firstmove of the SBV to use when there were unusual fluctuations in the domesticforex market. MBKE noted the SBV has not yet used the remaining two measures in2023.
The analysts expect the depreciation of about 2-3% of the dong against the dollar in the next 12months will not affect the Government's policy stance and the economicrecovery.
In addition, MBKE said although rice prices rose to a record levelin a decade, inflation should also be under control thanks to a series offavourable factors.
The analysts expect domestic interest rates will drop another1-1.5 percentage points in the near future, as well as the possibility that theSBV will cut its policy rates by 25 basis points to promote the recovery of theeconomy.
Shinhan Bank has recently also forecast the SBV will continue toease its policy to support the economy. However, the bank's analysts warned Vietnammay need to avoid further cutting interest rates due to weak exports anddeclining foreign exchange reserves while the country still has poor-performingbanks.
In a report released earlier this month, HSBC also said it expects the SBV todeliver another 50 basis point rate cut, the last one in the current easingcycle. Recently, the central bank has also signaled its openness to do more if ‘marketconditions allow’.
Shinhan Bank has also forecast that the SBV will continue to ease its policy tosupport the economy. However, the bank's analysts warned Vietnam may need toavoid further cutting interest rates due to weak exports and declining foreignexchange reserves while the country still has poor-performing banks.
In the Taking Stock August 2023 report released on August 10, World Bank (WB)also noted as Vietnam’s credit demand has remained persistently low despiteinterest rate cuts, further reducing interest rates may not have the desiredeffect of incentivising credit growth. Also, further interest rate cuts wouldincrease the interest rate differential with global markets, potentiallyputting pressure on the exchange rate.
Experts believe as the room to reduce the policy interest rates is graduallyexhausted, the fiscal policy will support the country’s economic growth in thesecond half of 2023.
“Fiscal policy support should be accompanied by continued monetary policyaccommodation but the space for additional loosening is constrained,” WB notedin the report.
Analysts at Viet Dragon Securities Company (VDSC) also forecast that in thesecond half of 2023, the fiscal policy will support economic growth. Accordingto VDSC’s analysts, some fiscal policies that will promote growth include: 2%VAT reduction policy (equivalent to 24 trillion VND); 20.8% increase in basicsalary from July 1, 2023 (equivalent to 54 trillion VND); 10-50% reduction for36 fees and charges for individuals and firms (equivalent to 700 billion VND);and the extension of VAT, CIT and land rent policies will continue until theend of 2023.
The SBV last Friday set the daily reference exchange rate at 23,837 VND per USdollar, up 11 VND from the previous day.
With the current trading band of /- 5%, the ceiling rate applicable for commercialbanks during the day is 25,027 VND per dollar and the floor rate 22,588 VND perdollar.
Under the same move, commercial banks on the day also increased the rate.
BIDV listed the rate at 23,593 VND per dollar for buying and 23,893 VND forselling, both up 8 VND from the end of August 10.
Meanwhile, Vietcombank kept both buying and selling rates unchanged at 23,540 VNDfor buying and 23,910 VND for selling./.
VNA
