The monetary market in Vietnam is seeing new impacts that are heavy enough to change cash flows.

In early September, the State Treasury of Vietnam began to expand its termed repurchase of government bonds in all working days of the week.

Previously, after the first session on July 13, the Hanoi Stock Exchange (HNX), the key auctioneer, expected the above operation to “bring a fresh breeze to the government bond market with the participation of a special investor - the State Treasury - to complete the government bond market with new operations, increase competition in the market, promote government bond transactions on the secondary market and support liquidity for market members”.

The money market thus has a new flow with a stronger current. At the same time, the State Bank of Vietnam (SBV) decided to sharply reduce the buying price of foreign currencies to create a "new breeze" again when it shifted from futures to spots.

In combination with these attendant impacts and new factors, coupon rates and the USD/VND exchange rate are changing in the interbank market. And according to a forecast of the Vietnam Interbank Market Research Association (VIRA), these two indicators will continue to decline deeply.

Before alternating flows

The SBV’s move to sharply reduce the buying price of foreign currencies took effect at the beginning of the second week of last August, coupled with the return to the spot delivery method.

As highlighted in the previous period forecast, that change took place shortly prior to September, the month when the market shifts focus on the policy meeting of the United States Federal Reserve (Fed) expected to signal easing policy, the month when the money supply from the SBV through previous purchase of foreign currencies is reduced; the month when funds are closed but it is likely to have certain fluctuations.

However, as above, the SBV's return to spot foreign currency purchases means creating an instant money supply flow when there is a transaction. At the same time, the fact that the State Treasury begins to expand the operation of buying government bonds is also a channel to generate a new supply beside term deposits at commercial banks over the past time.

There is one notable figure in the State Treasury's purchase of government bonds. The Treasury estimated a total funding limit of VND54,760 billion in the third quarter of this year while July and August spending was still limited, resulting in stronger spending in this September. What matters now is the market demand and the counterpart source of government bonds.

Given that the market has more such supply-generating factors while credit output is still facing major obstacles from the extended and prolonged social distancing restrictions in many provinces and cities across the country, money source is showing certain signs of stagnation amid ample liquidity, resulting in lower coupon rates in both primary and secondary markets.

Particularly in the interbank market, according to VIRA's forecast, the 1-week VND interest rate fell as forecast to 0.98% per annum on average in August year. This interest rate, according to VIRA's forecast, will keep declining deeply in September, averaging 0.81% per annum.

Also related to the adjustment by the SBV, the spot USD/VND exchange rate in the interbank market slumped sharply in August. Certain fluctuations were seen in the second half of August but the interbank rate gradually slipped near to the SBV’s buying price (VND22,750).

According to VIRA's forecast, the spot USD price in this market will further decline steeply in September, averaging at VND22,778, a sharp loss from the average of VND22,852 in August.

Stable trend persists

According to a consensus forecast by VIRA members, the consumer price index (CPI) was estimated at 2.73% in September as compared to a year ago. Low inflation will thus continue to extend as what has happened since the beginning of the year until now.

In that trend, the fourth COVID-19 outbreak is the overarching factor for commodity prices, with a focus on declining market demands. However, the pandemic leads to supply disruptions or major obstacles in the supply-demand connection, resulting in increased costs of transportation and distribution of goods. There are local price increases, especially for food products.

Furthermore, the average domestic gasoline price in the first eight months of the year rose by 22.86% from a year-ago period, which is also a notable impact on CPI growth.

However, in general, forecasts by VIRA and many other organizations as well shared the same outlook for low inflation this year.

Regarding the 10-year government bond yields, VIRA forecast a slight slide this September, to 2.06%, as compared to 2.09% in August. Nevertheless, the decline was as significant as 2.2-2.3%.

In furtherance, in the next three months, the 1-week VND interbank interest rate, spot USD/VND exchange rate and 10-year government bond yield tend to pick up again, according to the forecast by VIRA members. However, fluctuations in this forecast are not too big relative to the current rates. The money market with these key indicators is expected to continue to stabilize in the lowlands before entering year-end peak payment and payment season.