How will the banking system be affected when the State Bank sells a large amount of foreign...

According to SHS experts, the State Bank of Vietnam (SBV) selling a large amount of foreign currency to intervene in the exchange rate in 2024 will lead to a contraction in the M2 money supply.

SBV sold 9.35 billion USD from foreign exchange reserves in 2024

In its 2025 strategy report, Saigon - Hanoi Securities JSC (SHS) stated that 2024 did not meet expectations for exchange rate stability, as the spot USD/VND exchange rate increased by 5.01%. SHS estimated that the SBV had to sell about 9.35 billion USD from foreign exchange reserves, putting pressure on banks' foreign currency supply, increasing the shortage in the system.

In general, 2022 and 2023 are the years when the US Federal Reserve (Fed) raises interest rates, while 2024 will see three interest rate cuts totaling 1%, helping to reduce pressure on the USD/VND interest rate differential.

However, the SBV still had to sell USD, causing the VND to depreciate. SHS commented that after the US election, the USD index (DXY) strengthened, creating pressure on cash flows, especially primary income flows in the balance of payments, thereby affecting the psychology of exchange rate transactions.

Previously, the SBV announced to maintain the exchange rate ceiling at VND25,450, in order to dispel rumors about raising the ceiling, causing the market to react by closing long positions, helping to stabilize the exchange rate in the short term. This failure to raise the ceiling may have been learned from the exchange rate ceiling increase on April 15, 2024, which led to a foreign currency sale from April 22 to July 4, totaling about USD6.64 billion.

The second round of USD selling occurred in late 2024 when interbank rates fell sharply on December 17-18, facilitating rapid outflows. The market awaited the decision from the Fed meeting at that time, when Chairman Jerome Powell dampened market expectations for a sharp rate cut as US inflation remained unstable.

Previously, in November, although the State Treasury (KBNN) needed to buy USD to pay off debt (1.98 billion USD since the beginning of the year), the exchange rate was still tense and pressure increased when the profit cash flow was retained, but the SBV had not sold USD from foreign exchange reserves.

SHS assessed that the SBV's operating results could be more positive if the SBV maintained the channel of treasury bills of all terms to handle excess money in the system, thereby pushing interbank interest rates higher than the Fed Fund Rate, maintaining a positive USD/VND interest rate spread (SWAP), similar to the pre-Covid period.

M2 money supply to shrink significantly in 2024

According to the SHS report, M2 money supply in 2024 has decreased significantly, with an increase of only 9.42%. The main reason is the decrease in foreign exchange reserves of about 9.35 billion USD during the exchange rate interventions from April to July, as well as in the last two weeks of 2024.

Compared to 2022, when the State Bank of Vietnam (SBV) had to intervene strongly with a net sale of about 21 billion USD, by 2024, foreign currency sales continued and exceeded the accumulated purchases in 2023 by more than 3 billion USD, leading to an increasingly narrowing of the M2 money supply. Foreign exchange reserves are currently only at nearly three months of imports, according to the International Monetary Fund (IMF) standard.

In addition, pressure also comes from the State Treasury, when the demand for issuing government bonds decreases and public investment disbursement is still limited (only reaching 78% of the plan). Although the state budget in 2024 has a surplus of VND 206,700 billion, it still creates great pressure on the money supply in the system.

To overcome the gap between credit and capital mobilization, banks have increased the issuance of valuable papers and extended the issuance period. This not only helps solve the capital problem but also supports the adjustment of LDR and SFL ratios according to regulations.

This is a success in the management of the State Bank in 2024, thanks to the handling of this capital source, creating conditions for the shift from M2 to M3 money supply, while preparing capital for the draft to Basel III as required by the State Bank, according to the SHS report.

The amount of bank bonds issued in 2024 is estimated at about VND 302,881 billion, accounting for a large proportion of the total bond issuance in the first 11 months of the year, nearly double that of the same period and accounting for two-thirds of the total value of new issuance.

In addition to state-owned banks, some large joint stock banks such as Techcombank and ACB also recorded significant growth in the issuance of valuable papers, respectively 270% and 104% by the end of September 2024 compared to 2022.

However, this has caused the banking system to face high capital costs for bond issuance, while also putting pressure on net interest margins (NIM) when there is a shortage of mobilized resources. SHS experts believe that this will be the main problem that the banking industry will face in 2025.

Source: https://baodaknong.vn/he-thong-ngan-hang-se-bi-anh-huong-the-nao-khi-nhnn-ban-luong-lon-ngoai-te-241748.html