Though the global financial market has seen uncertainties this year, Viet Nam's currency and foreign exchange markets have remained stable.

According to the Singapore-based United Overseas Bank (UOB), the Vietnamese dong is one of the most stable currencies in Asia.

Despite major changes in the Fed's interest rate hike expectations and fears of a global recession, the dong traded in a narrow range of 0.8 per cent, at around VND23,600 per dollar, UOB said in its global economic outlook report for the second quarter of 2023 released recently.

UOB said when the State Bank of Viet Nam (SBV) balances efforts to promote economic growth and ensure price stability, it is likely that the SBV will favour a more loose policy in the coming period.

According to Dr. Vo Tri Thanh, member of the National Monetary and Financial Policy Advisory Council, besides inflation being under control, foreign currency liquidity has improved markedly thanks to the relatively positive supply of foreign currency from disbursed FDI inflows, the recovery of the tourism sector after the pandemic, and rising trade surplus, which has helped the exchange rate to be stable under global uncertainty.

Besides, foreign currency inflows from capital sales and disbursement of foreign currency loans have been quite positive. Vietcombank, SHB and SeABank this year signed a series of international credit contracts while VPBank completed the capital sale of up to about US$1.5 billion to foreign partners.

The above developments have facilitated the SBV to buy foreign currencies this year, which has helped increase the nation’s foreign exchange reserves and put a large amount of dong into circulation to support liquidity for credit institutions.

According to Saigon Securities, the exchange rate listed at banks has continued to cool down while the rate on the interbank market has approached the buying price on the SBV’s Operations Centre, which has activated foreign currency purchases from the SBV.

At the Government's regular meeting in March, Governor Nguyen Thi Hong said the SBV bought $4 billion in the first quarter of 2023.

According to experts, the SBV’s continual purchase of foreign currencies to strengthen the nation’s foreign exchange reserves is very important.

A member of the Financial Policy Advisory Council said increasing the nation’s foreign exchange reserves has helped the SBV have more room in managing its policies flexibly, stabilising the exchange rate, improving the value of the dong and creating confidence among foreign investors. Notably, in the context of strong market fluctuations, having a good foreign currency buffer helps the SBV to be more proactive and aggressive in intervening in the foreign exchange market when necessary.

Cautious policy

Forecasting exchange rate movements, UOB's analysts said the dong will likely remain stable though the SBV cut policy interest rates twice thanks to the recovery of exports and industrial production in the coming months, and falling inflation.

Forecast results in April of the Vietnam Interbank Market Research Association (VIRA) also showed the spot rate of USD/VND in the interbank market will be stable at around VND23,476 per US dollar, against VND23,592 in March.

Though the SBV’s exchange rate policy management is favorable, there remain challenges ahead, including the next Fed interest rate hike in May.

Besides, though inflation pressure has decreased, it cannot be underestimated because inflation is still close to the Government’s annual target of 4.5 per cent in the first quarter of 2023 while global inflation is forecast to remain at a high level and major central banks are predicted to continually increase interest rates and when they stop raising interest rates, they will still keep the rates at high levels.

The challenges will be barriers to the SBV’s efforts to stabilise the exchange rate at the end of the year.

Besides, there might be also unpredictable global risks that can cause difficulties for the SBV in stabilising the exchange rate.

Dr. Nguyen Huu Huan, head of the HCM City Economics University’s Finance Department, said exchange rate management will not be a headache for the SBV in 2023, but economic growth.

However, Huan noted, the SBV’s policy management, especially interest rate, should be more cautious because the SBV cut the policy interest rate twice within the past month to support economic growth. If the interest rate is reduced sharply, foreign capital flow can be withdrawn out of the country which will cause difficulties for the exchange rate.

Huan explained that currently, many overseas Vietnamese invest in Viet Nam because domestic interest rates are relatively stable. In addition, the prices of goods such as real estate and stocks are cheap. Therefore, if the interest rate is adjusted down too quickly, investors will withdraw their investment capital when they do not see much benefit.

Sharing the same view, Dr. Thanh said despite some advantages, besides the flexibility, the SBV’s monetary policy management still needs to be cautious. Accordingly, the SBV should not change the exchange rate policy management, but continue to maintain it.

With the current situation along with the abundant foreign currency supply, Thanh also forecasts the exchange rate will continue to be stable this year.

The VIRA also expects the stability of the exchange rate will last until the end of this year. It estimates the average spot rate of USD/VND in the interbank market in 2023 will be around VND23,626 per dollar.

The latest report of Maybank researchers on Viet Nam released recently even kept its previous forecast unchanged, predicting the USD/VND exchange rate will cool down to just VND22,900 per dollar by the end of 2023 and VND22,700 in 2024.

Meanwhile, from the perspective of the management agency, the SBV said it targets to stabilise the value of the dong until the end of the year. The SBV will continue to buy foreign currency when conditions permit. Legal foreign currency needs of individuals and firms will be fully and promptly met.

The SBV is ready to intervene when necessary to stabilise the foreign currency market that contributes to stabilising the macro-economy, the SBV affirmed. — VNS