Move to fortify forex positions

The State Bank is taking advantage of the country’s stable forex situation to reduce banks’ foreign currency positions and increase its own forex reserves. The authority last week announced it would cut commercial banks’ foreign currency positions to +/–20 per cent from +/–30 per cent, as stipulated in Circular 07/TT-NHNN, effective from May 2, 2012.

The move will see the credit institutions, entitled to engage in foreign exchange transactions, allowed to maintain a daily open position not exceeding 20 per cent of a bank’s equity. For foreign bank branches with total equity capital lower than $25 million, the forex position at the end of the day must not be over $5 million.

Cao Sy Kiem, former State Bank Governor, said it was the right time to reduce banks’ foreign currency positions as the forex market was stable. “It will help the State Bank increase forex reserves and control and use foreign currencies efficiently,” he said.

According to the State Bank, Vietnam’s forex reserves in 2011 were up 50 per cent against 2010 and by March 2012 that figure was up 30 per cent against the end of 2011. Vu Thanh Tu Anh, head of research at the Fulbright Economics Teaching Programme in Vietnam, said the country’s forex reserves might now be around $20 billion. “It’s reasonable that banks’ forex positions are reduced as the forex market is stable and there is little downward pressure on the domestic currency.

“Moreover, banks currently have good forex positions and with limited credit growth, they have to sell USD to obtain domestic currencies for supplementary liquidity,” said Anh. Doan Hoai, a senior economist at brokerage Viet Capital Securities, noted given the new limits, the forex market might be less volatile. “Recently, we have seen banks turn to short  forex positions to take advantage of high VND interest rates. Therefore, lowering the USD positions will discourage banks from turning to short USD positions on a large scale. In the future, it will reduce risks of dong depreciation when banks reverse their position,” said Hoai.

However, Anh argued that the most important factor was how the State Bank would withdraw foreign currencies which banks would sell out when their USD positions were narrowed, while still avoiding inflation resulting from having to pump VND to buy back foreign currencies.
“The State Bank should consider issuing bills or bonds in USD, instead of VND to increase forex reserves or paying off overseas debts and encouraging direct and indirect foreign investment,” said Anh.

Hoa warned that inflation remained high and the government needed to focus on stability.  
On March 24, the interbank rate was stable at VND20,828 per dollar. But the rates applied by commercial banks have increased since the State Bank’s Circular 07 on the forex position and Circular 03 regulating foreign currency lending were issued.

On March 20, Vietcombank and BIDV were selling USD at VND20,870 and VND20,850, respectively. On March 24, the rates inched up to VND20,920 and VND20,910 per USD, respectively.