Banking authority commences production of banknotes following a four-month halt.

Hangin' with the Dong: State Bank of Vietnam's Bill Issuance and its Impacts

HÀ NỘI — The State Bank of Vietnam (SBV) has resumed the issuance of bills, reversing a near four-month suspension, a move aimed at withdrawing cash from the banking system as the USD/VND exchange rate surges.

Four commercial banks were the lucky winners in the SBV's bidding for VND3.1 trillion worth of bills with a seven-day term and an annual interest rate of 3.5%.

According to experts, this resumption of the bill issuance channel indicates the SBV's intention to decrease liquidity in the banking system due to the high level of the USD/VND exchange rate.

Nguyễn Trọng Đình Tâm, Deputy Director of the Asian Securities Company's analysis division, considers the SBV's net liquidity withdrawal through the bill channel an appropriate action considering the USD exchange rate's persistent upward momentum.

On June 24, the SBV's central exchange rate for the US dollar against the VND was VND25,058 per dollar, up VND30 compared to the previous day. Since the beginning of the year, the USD/VND exchange rate has risen nearly 3% despite a 9% decrease in the US dollar index (DXY).

Tâm attributes the USD/VND exchange rate hike in 2024 to the dollar's strengthening, but the surge in the exchange rate at the moment is driven primarily by robust import demand supporting export activities during the three-month pause on US reciprocal tariffs.

Tâm suggests that the impact of the bill issuance tool on the USD/VND exchange rate is still being assessed by the SBV, as the June 24 issuance was on a relatively small scale, with a short term and low-interest rate.

The SBV's monetary policy continues to lean towards easing, as reflected in efforts to keep interest rates low and promote credit growth to meet an economic growth target of at least 8% in 2025, according to Tâm.

Regarding the impact of the SBV's move on the stock market, Tâm believes that the initial effect is minimal, but if the exchange rate fails to cool down in the short term, the SBV might increase the frequency and scale of bill issuance. At that time, the impact would increase in the stock market.

Predicting future trends, Tâm expects the USD/VND exchange rate to decline in the last months of the year as the effect of the 90-day tariff pause vanishes.

Tâm added that, according to the baseline scenario, Vietnam's key export products should remain competitive even after the new tax rates take effect. Additionally, he pointed out that the US Fed's anticipated two interest rate reductions in the second half of the year, a rising dollar supply from remittances, tourism, and the potential upgrading of the stock market could aid in lowering the exchange rate.

State Bank of Vietnam's Bill Issuance: The Short and Long Game

The SBV's bill issuance plays a significant role in shaping the USD/VND exchange rate and the Vietnamese stock market in the short term and long term.

Short-term effects:

Liquidity and Exchange Rate Pressure: SBV's issuance of bills or open market operations can impact the liquidity of the banking system, either injecting or withdrawing cash. In general, net injections of liquidity ease the exchange rate pressure on the VND against the USD, potentially leading to a lower USD/VND exchange rate in the short term.
Interest Rates and Capital Flows: Lower SBV-bill rates can make VND assets less attractive relative to USD assets, potentially influencing short-term capital flows and exchange rate movements. However, liquidity injections can also support domestic credit conditions and the stock market, as banks have more funds to lend or invest.

Long-term effects:

Exchange Rate Stability and Policy Flexibility: Management of bill issuance is essential to maintaining exchange rate stability, which is critical for Vietnam's economic growth and investment climate. Over time, consistent liquidity management supports confidence in the VND and helps mitigate volatility in the USD/VND exchange rate.
Economic Outlook and Capital Flows: The long-term strength of the VND and the stock market relies on broader macroeconomic factors such as GDP growth, trade policy, and foreign investor sentiment. Continued economic growth, favorable trade policies, and positive investor sentiment are positive factors that could help keep the VND stable and the stock market growing over the long term.

In Summary

| Impact Aspect | Short Term | Long Term ||----------------------------|----------------------------------------------|-----------------------------------------------|| USD/VNĐ Exchange Rate | Lower bill rates and net liquidity injection ease exchange rate pressure, stabilizing or lowering USD/VNĐ | Supports exchange rate stability amid external shocks, but influenced by global factors || Liquidity | Fluctuates with bill issuance and expiry, influencing bank funding and market liquidity | Managed liquidity promotes macro stability and credit growth || Stock Market | Improved liquidity conditions can boost market sentiment and foreign investor inflows | Stable exchange rate and economic growth prospects foster sustained stock market development || Foreign Capital Flows | Sensitive to relative interest rates and short-term risk sentiment | Influenced by global portfolio reallocations and economic outlook |

In conclusion, the SBV's bill issuance and open market operations significantly impact the liquidity, interest rates, and the USD/VND exchange rate profile in the short term, which, in turn, affect the stock market's sentiment. In the long term, these operations contribute to broader economic and market stability, although external factors and structural issues also play essential roles.

Headquarters of the State Bank of our website. Photo sbv.gov.vn

The incorporation of AI in the banking-and-insurance industry could potentially allow the State Bank of Vietnam (SBV) to better assess the impact of its monetary policy actions, such as bill issuance, on exchange rates and financial markets.
The SBV's decision to resume bill issuance, amid a surging USD/VND exchange rate, could be part of a broader war on inflation, which might also involve adjustments in finance and industrial policies.
As artificial intelligence becomes more prevalent in the economy, policymakers could use AI models to predict the effects of different policy scenarios, providing them with valuable insights to formulate efficient and effective policies, such as managing liquidity through bill issuance in the banking-and-insurance sector.

Banking authority commences production of banknotes following a four-month halt.