In less than a week, from December 5 to 9, the State Bank of Vietnam performed two foreign exchange swap operations, with a maximum volume of $500 million per session.
As Vietnam pursues an ambitious 10% GDP growth target, recent macroeconomic signals warn of monetary policy limits. Financial experts note that after prolonged easing, the banking system faces liquidity stress, making further rate cuts difficult. This shift reflects both domestic pressures and global trends where long-term rates remain elevated.
Early signs of this policy pivot are evident in liquidity indicators. The overnight interbank rate recently surged above 7%, the highest since October 2022, signaling a widespread short-term capital shortage.
In response, the State Bank of Vietnam (SBV) raised the open market operations (OMO) rate from 4% to 4.5%, signaling a move from easing toward a flexible stance to balance inflation and exchange rates.
By November, most commercial banks, both private and state-owned, significantly hiked deposit rates to bridge liquidity gaps. This strain stem from 2022–2025, during which credit growth consistently outpaced deposit mobilization.
The situation is critical for many banks as their pure Loan-to-Deposit Ratio (LDR) has far exceeded 100%, forcing a heavy reliance on OMO and interbank channels to sustain credit growth.
In this context, the State Bank of Vietnam activated foreign exchange swaps to inject VND liquidity into the system. Between December 5 and 9 alone, the central bank conducted two foreign exchange (FX) swap operations, with a maximum volume of $500 million per session.
Dr. Irfan Haider Shakri, a finance lecturer at RMIT University Vietnam, shared expert perspectives on the State Bank of Vietnam’s strategies for steering monetary policy.
The sharp rise in interbank rates to 7 per cent indicates underlying issues with capital circulation in the banking system. Beyond liquidity support, can forex swaps help address any system-wide risks or market sentiment factors that may be causing credit institutions to hesitate in lending to one another?
Dr. Irfan Haider Shakri: The surge in interbank interest rates above 7 per cent signals acute liquidity stress within the banking system, a key concern for financial stability. By deploying forex swaps to inject VND liquidity, the SBV is demonstrably prioritizing short-term interest-rate control and liquidity stability.
The mechanism provides a collateralized, temporary liquidity boost without immediately sacrificing foreign exchange reserves in a spot sale, thereby offering a more nuanced approach than outright intervention.
However, a critical trade-off exists, primarily manifesting when the swap contracts mature. The SBV, which sells USD spot and buys it forward, must repurchase the USD at a pre-agreed forward rate. This forward commitment places a ceiling on the VND's future strength. While the current action eases the immediate VND shortage and supports interest rate stability, it creates a future obligation that could exert depreciation pressure on the VND when the contracts unwind, complicating the long-term objective of exchange rate stability.
Some analysts argue that, instead of relying on forex swaps, the State Bank should consider reducing the reserve requirement ratio to release more VND liquidity into the system. How would you compare these two policy tools in the current context?
Dr. Irfan Haider Shakri: The comparison between relying on forex swaps and implementing an RRR reduction involves a critical choice between tactical and structural monetary management. The SBV's use of swaps is a targeted, reversible, and short-term measure, providing precision to address the acute VND liquidity shortage in the interbank market without permanently altering the money supply.
This supports short-term interest rate stability while maintaining the necessary flexibility given exchange rate sensitivities.
Conversely, an RRR reduction is a structural, permanent, and system-wide policy signal that carries the high risk of aggressive monetary easing. Releasing such a large, unconditional volume of liquidity could quickly unanchored inflation expectations and fuel uncontrolled credit growth, a significant long-term risk.
Therefore, for managing a temporary liquidity shock, the precision and self-liquidating nature of forex swaps make it the demonstrably superior tool over the blunt, permanent impact of an RRR cut.
Tight VND liquidity often pushes up deposit rates and creates pressure on the bond market. How might the State Bank’s use of forex swaps influence government bond yields and the funding costs of businesses in the coming period?
Dr. Irfan Haider Shakri: The State Bank's use of forex swaps to inject VND liquidity directly mitigates the financial system's liquidity squeeze, which is the primary cause of rising deposit rates and bond market stress. By making VND more readily available in the interbank market, the SBV immediately curbs the urgent need for commercial banks to aggressively compete for customer deposits to meet regulatory ratios and funding needs. This action is expected to lead to a moderation or stabilization of rising deposit rates, thereby easing the underlying funding costs for commercial banks. This reduced cost-of-funds pressure should, in turn, facilitate a stabilization of lending rates for Vietnamese businesses in the coming period.
Regarding government bond yields, the liquidity injection reduces the urgency for banks - key holders of G-Bonds - to sell their holdings to raise cash, thereby easing downward pressure on bond prices. More fundamentally, the stabilization of the short-term interbank rate, which serves as a crucial benchmark, is expected to cool off the short end of the government bond yield curve. The overall success, however, hinges on the swaps being scaled adequately to comprehensively cover the systemic liquidity deficit.
Thank you for this valuable perspective.
Tags:
Tags:
VPBankS has identified four major commercial banks that meet the criteria for credit limit expansion.
The Vietnamese dong has strengthened against the U.S. dollar after hitting a peak in late July, with the exchange rate now at its lowest level in several months.
Vietnam's deposit interest rates may see a slight increase in the second half of the year as the economy shows clear signs of improvement, according to banking experts.
