In late September, the State Bank of Vietnam (SBV) resumed issuing treasury bills through open market operations, causing financial investors to worry about a "monetary policy reversal".
Concerns about the reversal of the SBV's monetary policy are quite understandable when in June last year, the SBV also issued treasury bills on the open market channel before the SBV decided to increase the operating interest rate in September 2022.
However, SSI Securities Company believes that the current context has many differences. Therefore, the State Bank continuously issuing credit notes does not mean that interest rates will increase again.
In June last year, the State Bank issued treasury bills on the open market and then the interest rate increased again. At this time, the issuance of treasury bills is being carried out consecutively. Illustrative photo
Similarities with 2022 phase
According to SSI Securities Company, exchange rate pressure is one of the main reasons why the State Bank of Vietnam issued credit notes in both June 2022 and September 2023.
This monetary policy tool is implemented to regulate a certain amount of liquidity in the system in the short term – part of the effort to reduce the interest rate gap between VND and USD and thereby limit speculative activities in the market.
In terms of the international context, the pressure for the VND to depreciate in both 2022 and 2023 comes from the context of the USD potentially increasing more strongly due to decisions from the US Federal Reserve (Fed).
Although the Fed's position has changed compared to last year (2022 marks the first year of the tightening cycle while the Fed is currently approaching the end of its rate hike cycle), the USD has maintained its strength and appreciated significantly compared to other currencies.
On the contrary, the State Bank is implementing a loose monetary policy to support growth and the use of these credit note issuance tools is the first step to limit exchange rate pressure.
In the domestic context, the overnight interbank interest rate for VND was below 1% at the time of the issuance of the bill when liquidity was abundant across the system (due to credit growth hitting its ceiling in mid-2022, while credit activities slowed down in 2023). This led to a large interbank interest rate differential between VND and USD (-100 basis points in 2022 for 2 consecutive months and -500 basis points in 2023 for 5 consecutive months), causing banks to strongly increase their demand for holding USD over VND.
“The SBV's move to issue treasury bills can help adjust liquidity in the system in the short term, and from there it is expected to push up the interbank interest rate level in VND, helping to reduce the interest rate difference between USD and VND,” SSI assessed.
Differences with 2022 phase
Besides, SSI also pointed out the difference between the two stages to show that the State Bank increasing the issuance of credit notes does not mean that interest rates will increase.
According to SSI, the first difference comes from the bidding mechanism. The issuance of treasury bills last year was by volume bidding (and then converted to interest rate bidding), while interest rate bidding has been used in the past 5 days.
The interest rate of SBV bills issued this year is almost the same as the issuance period last year (with a longer term), but the nature is quite different if we look at the details. Specifically, liquidity at banks is abundant, the cause of this problem this year is much different than last year.
In 2022, the main reason was that credit growth reached the ceiling limit from mid-year, while in 2023, the slow credit growth was due to slower economic growth (credit growth as of September 15, 2023 was only 5.5% compared to the beginning of the year (end of August: 5.3%).
One important difference from last year is that while the overall goal is to reduce pressure on the Dong, the SBV has chosen to issue treasury bills as an option starting in 2023 (instead of selling foreign exchange reserves as in 2022), in order to limit the long-term impact on banking system liquidity.
Regarding exchange rates, unlike last year, the level of exchange rate fluctuations in the banking market and the black market shows that the supply-demand gap is leaning more towards the banking market – most likely due to exchange rate speculation from commercial banks. The foreign currency position in the system has not yet faced too much pressure thanks to the abundant foreign currency supply.
Another positive point is that the SBV's position is relatively different from the same period last year (thanks to the amount of foreign exchange reserves that were added in the first 6 months of the year).
“In general, the SBV’s issuance of treasury bills is a way to adjust the short-term liquidity status in the system and is a common activity of central banks, and does not mean that the SBV has reversed its monetary policy. The purpose of the SBV is to absorb liquidity from the secondary market to reduce short-term exchange rate speculation pressure,” SSI commented.
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