Why does the SBV reduce foreign currency purchases?

According to financial experts, businesses will not be negatively impacted by the said action by the SBV.

The State Bank of Vietnam (SBV) has been sharply reducing the purchase of foreign currencies to lessen the pressure on the USD/VND exchange rate.

Reduction in buying foreign currency

The SBV has just adjusted down the USD forward bid-rate by 50 VND to 22,975 VND/USD. Previously, on January 4, 2021, the SBV stopped listing USD/VND spot bid-rate to switch to buying 6-month forward contracts at VND23,175/USD with requirement for cancellation, down 50 VND compared to the nearest spot rate. However, it is a forward contract, so this rate will be applied to the SBV's purchases of foreign currencies commercial banks at the end of this year and early next year.

Some financial experts said that the reduction in USD/VND forward rate by the SBV is to anticipate the USD downtrend. Indeed, after peaking at the end of March 2021, USD dropped by 2%. However, the USD is recovering on speculation that the FED might start taking taper when inflation in the US is heating up.

What businesses benefit?

The SBV's restriction on buying foreign currency means that most of the foreign currencies earned exports and disbursement of FDI, remittaces, etc. will stay in the market. That will reduce pressure on USD/VND rate at the end of this year, because the demand of businesses for foreign currency tends to go up at that time. It is the first benefit that businesses will gain.

According to experts, the said move by the SBV also eases inflationary pressure. Because the latter is forecasted to rise up by the end of this year when businesses step up production-business-export, while consumer demand will also increases strongly on this occasion.

However, the restriction on buying foreign currencies also decrease the ability of the SBV to support liquidity through this channel, while the liquidity is often weak at the end of the year due to the higher cash needs  people and businesses. A shortage of liquidity can push up interest rates.

Is it worrisome?

However, according to financial experts, the said perspective is not worrisome because the liquidity of the banking system is still abundant, even though the level of excess liquidity has decreased compared to the beginning of this year. In addition, a large amount of VND will be flowed into the market in the near future when the foreign currency forward contracts of commercial banks will mature in July and August, 2021. Notably, the SBV also has a very powerful tool that can quickly support liquidity for the economy, which is the open market operations (OMO).