Interest Rate Gap Widening

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Report on the capital market in February released by Saigon Securities Incorporation (SSI) Retail Research said that in the peak season after the Lunar New Year holiday, the State Bank of Vietnam (SBV) quickly withdrew money via Open Market Operation (OMO) channel with only 61.449 trillion dong of buying forward value and up to 195.097 trillion dong of maturity. The net withdrawal value reached up to 133.648 trillion dong, and the OMO value in circulation continuously dropped from above 150 trillion dong to nearly 19 trillion dong. The bill channel continued to see no transaction and maintained a balance of zero.

The amount of money returned to the system and the sale of US dollar for foreign exchange reserves have raised liquidity of commercial banks. The interbank interest rates fell from 4.9 percent in the period before the Lunar New Year to four percent per annum on overnight term, and from 5.05 percent to 4.3 percent per annum on one-week term.

The US dollar interest rates on the interbank market also slightly decreased by two basis points to 2.47 percent per annum. The dong/US dollar interest rate difference was ranging around 1.5-1.7 percent, down compared to the 1.8-2.4 percent per annum recorded in January 2019.

According to information of the Ministry of Finance (MOF), the disbursement of investment capital from the State budget in the first two months of 2019 was 16.2 trillion dong, equivalent to 3.9 percent of the plan assigned by the National Assembly.

After the long holiday and the specific allocation of investment capital for projects has been completed, the disbursement of public investment will increase in the near future and the amount of capital deposited by the State Treasury at the SBV will tend to decline. Thus, the liquidity will be less favourable as in the last month.

In addition, since maintaining the gap of dong/US dollar interest rates at a reasonable level will limit the need to hold US dollars, the interbank interest rates are likely to fluctuate around four percent per annum on overnight term.

For the interest rates on market 1, short-term rates have been lowered by many banks, and are currently maintained at 4.3-4.5 percent per annum on terms from one month to less than six months. On terms from six months and more, there have been contradictory adjustments at banks, depending their capital balance in order to meet the requirement for short-term funds used for medium and long-term lending of each bank.

The interest rate gap, thus, has been widened, reaching 5.5-7.5 percent per annum on terms from six to less than 12 months and 6.4-eight percent per annum on 12 and 13-month terms.

SSI Retail Research stated that in addition to meeting the capital requirements of the SBV which took effect from January 1st 2019 and since March is usually the month to speed up disbursement of credit to fulfil the first quarter’s target, the demand for capital will increase high and interest rates are likely to be maintained stable at the current levels.

Regarding the exchange rate, in February, the SBV continued to purchase US dollars although the volume was not has high as in the previous months. Commercial banks actively sold US dollars to the SBV when the buying exchange rate was kept unchanged at 23,200 dong per US dollar, higher than the buying rate of commercial banks in the last two months.

The exchange rate fluctuated in a narrow band on both banking market and free market, ending the month with a slight decline of 10 dong compared to the end of the previous month, reaching respectively 23,150/23,250 dong per US dollar, 23,190/23,210 dong per US dollar. The central reference rate continued to be raised by 47 dong per US dollar. Overall, the exchange rate increased by 90 dong per US dollar in the first two months of the year.

The disbursement of Foreign Direct Investment (FDI) in the first two months of the year is often much lower than the later months of the year. However, in the first two months of 2019, the FDI disbursement in Vietnam reached 2.58 billion US dollars, up by 9.8 percent over the same period of 2018 the highest increase in the past three years.

SSI Retail Research believed that this is a positive sign and forecasted that the US dollar supply in March will continue to be abundant thanks to both FDI and Foreign Indirect Investment (FII). Foreign investors sharply increased the net buying value on the stock market, in which the cash flows of Exchange-Traded Fund (ETF) alone reached approximately two trillion dong.

With good foreign currency supply, the exchange rate level is predicted to be stable around 23,200 dong per US dollar. However, the development of the US-China trade negotiations and the Chinese exchange rate will remain an unknown factor which should be noted.


Category: Finance, Vietnam

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