Foreign reserves hit record high of US$40 billion: central bank

The State Bank of Vietnam (SBV) purchased more than US$100 million in the past two days, capitalizing on a slight strengthening of the Vietnamese dong.

The US dollar/Vietnamese dong exchange rate hit VND22,300 per dollar earlier this week. Following the central bank's aggressive purchase, the dong edged slightly downward.

The dong's daily mid-point rate against the US dollar, which the central bank adopted earlier this year, dropped 0.14% from its 22,000 level last week.

During a recent cabinet meeting, SBV Governor Le Minh Hung said current reserves exceed the record high of US$40 billion and represent enough funds to cover three months of imports. He estimated that the SBV had purchased US$11 billion worth of foreign currency toward the end of September.

According to Hong Kong-based lender HSBC, Vietnam’s foreign exchange reserves (excluding gold) reached an estimated US$38 billion in June.

The bank cited the International Monetary Fund (IMF) as saying that Vietnam’s foreign exchange reserves sharply declined to some US$27.9 billion at the end of last year during a campaign to curb dollar hoarding and stabilize the foreign exchange market.

HSBC reported that Vietnam managed to enlarge its foreign reserves to around US$33.6 billion in the first quarter of this year. The lender further estimated that the central bank’s stockpile of foreign currency had increased by US$8 billion over the first five months of this year.

On October 18, the dong fell further to around VND22,309 – VND22,310 per dollar on the interbank market at the beginning of the trading day. Abundant supply and good liquidity however stopped the dong from falling further against the dollar. The dong closed at VND22,306-VND22,307 per dollar.

Commercial banks forecast that the dong/dollar exchange rate is highly likely to continue strengthening to VND22,300 per dollar due to abundant supply in the final months of the year.

“Excess liquidity in the banking system will remain in the next few weeks. Inflation is expected to remain low, edging up by 0.2% – 0.3% in October. We think, in the short-term, the exchange rate will continue to hover around VND22,300 per dollar,” said a banker in Ho Chi Minh City.

Local lenders agreed that the dong/dollar exchange rate shifts are based on local demand and a supply principally maintained by large importers.

They view the supply of foreign currency as stable, but expect demand to soar in the coming months, according to local bankers.

Earlier this year, the SBV decided to ease exchange rate rules, setting the official mid-point rate of the Vietnamese dong against the US dollar on a daily basis.

Vietnam previously adopted a system that permitted the dong to trade around a fixed range that the central bank adjusted from time to time.

During an exclusive interview with VnExpress in April, SBV Director Bui Quoc Dung said Vietnam isn't ready to allow the dong/dollar rate to float freely according to market forces.

Dung claimed Vietnam's financial market hadn't fully developed and domestic businesses remain ill-equipped to manage the risks associated with foreign currencies.