The day that Russia invaded Ukraine, on February 24, 2022, the Vietnamese dong was trading at 22,843 dong to one US dollar–it had barely moved since the start of the year. This was in line with much of the past decade in which the local currency had only depreciated marginally, around 10 percent, since 2012.
A feather in the cap of Vietnam’s central bank–the State Bank of Vietnam or the SBV–this had been achieved using a number of pulleys and levers to stop the currency from moving too far in either direction. In particular, it limited trading of the Vietnamese dong on international markets, had a floating peg in place, and had a penchant for spending its foreign currency reserves and issuing short-term treasury bills.
Indeed, just a couple of months before that fateful day in February of 2022, it was even boasting how successful it had been keeping the dong relatively steady, even if it did appreciate a little, throughout the COVID-19 pandemic. This, the governor of the State Bank noted, was particularly true compared to its neighbours, namely Malaysia, Thailand, and Singapore.
That said, this pride was to be short-lived. The onset of war in Eastern Europe was about to trigger a chain reaction that would see demand for US dollars soar and demand for the local currency significantly weakened in what would be perhaps the ultimate test of the SBV’s resolve.
Inflation abroad
When Russian forces crossed the border into Ukraine commodities markets reacted.
Russia was resource-rich and among the biggest suppliers of oil in the world. The conflict would undoubtedly impact supply lines, moreover, economic sanctions were set to push the price of oil up.
This in and of itself was not a big issue for Vietnam in that, relative to more developed economies, its oil consumption wasn’t huge–just 478,000 barrels, a fraction of the 19.7 million barrels of oil the US went through daily.
That said, the burgeoning Southeast Asian nation had become incredibly dependent on trade with the United States. The US was the biggest buyer of Vietnam’s exports, accounting for nearly US$30 billion more than second place, China, in 2023.
The US, however, was hugely dependent on oil to power its massive economy and as oil prices spiked so did the price of goods in the United States. With goods more expensive, consumers had to tighten their belts and buy less, and this reverberated across the Pacific in Vietnam where orders from the US started to decline.
Inflation at home
As inflation began to skyrocket around the world, pressure began to build on local prices too.
Vietnam, however, already had two key mechanisms in place by which it could keep inflation under control.
The first was the Law on Prices, with which the price of most key input items like petrol, electricity, and telecommunications, were regulated by the government–By applying retail price limits, Vietnam could control the price of certain goods and by extension its consumer price index.
But this came at a price (excuse the pun).
Firstly, this led to petrol being sold at below cost which saw everyday Vietnamese forced to queue for hours at petrol stations with privately owned petrol retailers closing down rather than selling petrol at a loss.
The state power provider, EVN, also had to sell electricity for less than what it cost to produce which led to a loss in 2022 for the organisation of US$816.7 million.
Moreover, these price controls were not working alone, they were also complemented by credit growth limits through which bank lending was capped by the SBV.
But these limits were to prove problematic. With the price of raw materials rising and limited new orders, businesses needed loans to cover what looked to be short-term cash flow problems. However, credit growth limits by the start of the fourth quarter of 2023, for a number of banks, had already been reached–they couldn’t lend anymore.
To further add fuel to the fire, Decree 65, which added greater regulations to corporate bond issuances, kicked in on September 16. This made utilising corporate bonds much more difficult and businesses that had depended on this form of financing were now looking for loans from banks, too.
Demand for bank loans was soaring. However, the SBV was reluctant to increase bank credit growth limits much more than it already had–businesses would need to find capital elsewhere.
Interest rates go up
There was, however, a bigger problem. Whereas Vietnam was using credit growth limits and price caps to keep inflation under control the US had been raising interest rates. This was making the US an attractive investment destination and had seen funds flow out of not just Vietnam but emerging markets broadly and into US stocks and bonds.
As a result, the value of most free-floating Asian currencies had fallen significantly.
In fact, by September 22, the Thai Baht had lost 11.92 percent, the Malaysian Ringgit had fallen 8.27 percent, and the Singapore dollar was down 4.26 percent. The dong, however, had been somewhat more resilient, losing just 3.66 percent. This had, however, cost the SBV billions in US dollar currency reserves, roughly US$20 billion worth.
But Vietnam’s dollar reserves were finite and by September, it was estimated to have just US$89 billion left. This was still above the IMF recommended threshold of three months of imports, but only just. With the dong still under pressure, and foreign reserves running out, the SBV would need to change tact.
As a result, on September 23, the State Bank eschewed digging into its foreign currency reserves further and instead raised its key interest rates by one percent.
Vietnam’s peg is relaxed
The SBV had fended off demands to increase credit growth limits, had burned through a good chunk of its US dollar reserves, and had even raised interest rates by 1 percent, however, the dong’s managed peg, which allowed for the currency to be traded within three percent either side of a central rate set by the SBV, was still under intense pressure.
As a result, on October 17, the decision was made to increase the trading band from three to five percent.
With more room to fluctuate, the Vietnamese dong did just that.
From October 16 to October 24 the currency lost 2.98 percent of its value falling from 24,135 to 24,845 Vietnamese dong to the dollar. But pressure on the local currency was still not easing and the SBV resolved that even more would need to be done.
As such, on October 25, 2022, the SBV increased its key interest rates by another one percent.
A day later, the local currency was trading at 24,845 up from 24,855, a gain of 10 Vietnamese dong–finally it was starting to level off. Then on November 10 the US consumer price index for October was released and revealed inflation had slowed down much more than expected. As a result, upward pressure on the US dollar started to ease, and by the end of 2022, the dong was trading at 23,635 dong to the dollar down from its peak of 24,874 at the beginning of November and just 3.08 percent from where it was at the start of the year.
But whereas it may have seemed that the storm had passed, it would become quickly apparent moving into 2023, that the Vietnamese dong was simply passing through the eye.
New year, new challenges
In Vietnam, at the beginning of 2023, the sense of optimism, after a tumultuous 2022, was almost palpable as key decision-makers went about setting targets for the year. Specifically, they wanted to see GDP grow by 6.5 percent, inflation stay below 4.5 percent, and credit growth come in somewhere between 14 to 15 percent.
These were ambitious goals in a good year, and as data started rolling in at the end of January it quickly became clear that 2023 might not be as good of a year as the goal-setters needed it to be.
In particular, both imports and exports had taken a dive, down 24 and 25.9 percent, respectively, compared to January 2022.
Furthermore, credit growth by the end of January was just .1 percent. The demand for credit was gone with many firms finding ways around their inability to borrow from banks by selling assets, not paying their bills, or accessing funds from nefarious third parties. As a result, many businesses not only no longer needed the money but many could also not satisfy borrowing criteria with high levels of debt and few, if any, assets left to mortgage.
By the end of February, there had been little improvement, with credit growth far from where it needed to be, coming it a meagre 0.85 percent for the first two months of the year.
Faced with a reality in which the rapid economic development that had turned Vietnam from a sleepy Asian backwater to a thriving, dynamic manufacturing powerhouse, and that had been central to the legitimacy claims of the country’s leadership, the State Bank stepped in once again.
In almost a complete one-eighty, the challenge now for the bank was not that the US dollar was growing stronger–although it still was quite strong–but rather that nobody wanted Vietnamese dong. In this context, the only real option the state bank had, in terms of monetary policy, was to cut interest rates which is exactly what it did.
On March 15 the rediscount rate was cut by 1 percent. This was followed by a half-a percent cut to the refinancing rate on April 4; then another .5 percent to the refinancing rate on May 25; and finally an additional .5 percent cut to both the refinancing and rediscount rate on June 19.
The demand the SBV had hoped to stimulate, however, was not forthcoming. That is to say, between March and June credit growth would average just shy of 1 percent each month and in July it would even contract by a little more than one-fifth of a percent.
But more to the point, this had also widened the gap between US and Vietnamese interest rates making US investment vehicles even more attractive than they were before and this was putting pressure back on the dong.
Moreover, well aware of the challenges the economy was facing, everyday Vietnamese had begun to eschew buying big-ticket items like houses and cars and instead had started banking their excess cash. As a result, banks were flush with dong, but with no one to lend it to, and so began lowering interest rates on deposits. This, however, had the effect of driving consumers to look for alternative investment vehicles.
The stock market for one began to climb, but what was really stealing headlines was the growing demand for gold.
A historically popular store of wealth in Vietnam, investors were returning to the precious metal in droves. This was despite the central bank’s best efforts, in years past, to diminish investor interest in gold by severely restricting its import. And, in fact, this may have even exacerbated the problem, with limited supply causing the price to spike. This, it was argued, was encouraging gold smuggling which required US dollars and therefore was heaping even more pressure on the dong.
Likewise, in the past, the greenback had been seen as a safe haven hedge against a devaluing dong and investors once again returned to holding US dollars. Notably, it was not so much that people were buying US dollars per se, but rather that they weren’t cashing in the US dollars they already had or were selling them on the black market where the price wasn’t regulated and therefore was higher.
That is to say, demand for dong was sinking and by the end of September, credit growth had reached just 7.41 percent. This was barely half of the annual target. In terms of the value of the dong, it was sitting at 24,325 down 2.92 percent since the start of 2023 or 6.43 percent from the start of 2022.
Still struggling to arrest the decline of the local currency, once again the State Bank stepped in.
On September 21, 2023, the SBV started issuing 28-day treasury bills to suck some of the excess dong out of the market. This went on throughout October with more than US$9 billion worth outstanding at the peak. At the start of November, however, news out of the US once again saved the day, with markets interpreting a statement from Federal Reserve Chairman Jerome Powell as suggesting rate hikes might be over. The heat subsequently came off the dollar and the State Bank’s T-bill issuances drew to an end.
That said, credit growth was still well below target and there was broad consensus that the local economy was still in need of stimulus. With this in mind, key decision-makers began pushing banks to lend more.
In response, local banks began utilising some very aggressive outbound marketing campaigns, and in the last two months of the year, wrote a staggering total of US$30 billion worth of loans. This was almost as much as the US$36 billion worth of loans made in the entire first ten months of the year.
New Year 2024
In January of this year, the effects of the banking sector’s end-of-year lending frenzy became quickly apparent. Cars and motorbike sales had jumped alongside consumer spending more broadly. This success, however, was to be short-lived. With credit growth targets reset, the pressure on banks to lend was gone, and once again credit growth declined recording a contraction in January of .68 percent.
That said, the new year also brought some positive results in other areas, with imports and exports in January both recording year-on-year growth, 34.4 percent and 46 percent, respectively. This was, in general, welcome news. However, it also presented another challenge–in 2023 firms had burned through inventories rather than importing more raw materials and with their supplies depleted they would need to stock up again. This would mean more imports and more demand for US dollars.
Damned if you do, damned if you don’t
In mid-March, the Chairman of Vietnam Airlines stood before a conference chaired by the Prime Minister of Vietnam and lamented that with each percent the Vietnamese dong depreciated the airline realised a loss of US$12 million.
Conversely, at the same conference, the Chairman of the Vietnam Textile and Garment Group, told attendees that the garment and textile sector was losing its low-cost competitive edge. Among its key competitor markets, currencies were devaluing much faster than the local currency, which meant that US dollar buyers could get a lot more bang for their buck in countries like China, Turkey, and Bangladesh. This, he claimed, was at least part of the reason that garment and textiles exports in 2023 had fallen off the proverbial cliff.
Whether either of these men managed to influence key decision makers is debatable, however, these two views together serve to highlight one inalienable truth: whichever way the currency goes there will always be both winners and losers.
That was six weeks ago and since then the State Bank has issued billions of dollars worth of treasury bills and has taken to dipping into its US dollar reserves once more.
This does appear to have ‘stabilised’ the currency for now, however, it’s worth remembering that countries like Mexico, Argentina, and Thailand, all had varying degrees of success with currency pegs and more nuanced monetary policy, that was, of course, until they didn’t.
With this in mind, keeping track of Vietnam’s monetary policy can be crucial for foreign investors already operating in or considering establishing themselves in this rapidly developing country. With this in mind, these firms should make sure to keep up to date with the latest developments by subscribing to the-shiv.