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Friday July 12th, 2024

Vietnam selling SBV bills to stabilize the Dong, as Sri Lanka rupee also weakens

ECONOMYNEXT – The State Bank of Vietnam (SBV) is selling its own bills and also selling dollars to absorb liquidity and stabilize its currency against the US dollar, Pham Chi Quang, Director General of the Monetary Policy Department has said.

The Vietnam Dong has depreciated against the US dollar by about 5 percent since the beginning of 2024, compared to a 5.06 percent fall of the Taiwan New dollar, 6.31 percent of the Thai Bhat and 5.66 percent of the Korean Won and 10.87 of the Japanese Yen, he said.

Rising US dollar rates and lower VND rates were also adding to the pressure he said.

Vietnam recorded a balance of payments surplus in the December 2023 quarter. If the liquidity is not mopped up the money eventually turn into imports through the credit system.

Meanwhile Qang said, from the beginning of the year to mid-May, the import sector has recovered strongly, estimated at 132.23 billion dollars, an increase of 19.7 billion over the same period in 2023.

US interest rates were high and VND interest rates were lower, which were making economic organization buy dollars, he said.

he SBV has managed the exchange rate in a flexible manner, helping to improve the absorbability of shocks, in collaboration with the SBV bill issuance in order to decrease the VND liquidity surplus, thereby reducing the pressures on the exchange rate.

Vietnam has begun selling SBV bills “in order to decrease the VND liquidity surplus” and help the dong, Quan said.

The move comes as Sri Lanka’s rupee is also coming under pressure, after a build up of excess liquidity form dollar purchases.

“Secondly, from April 19, 2024, the SBV has sold foreign currencies to support the market liquidity and serve the legitimate foreign currency demands, while stabilizing the market psychology, thereby contributing to stabilizing the macroeconomy and controlling the inflation,” Quang said.

Vietnam uses the exchange rate as a domestic stability tool, but due its flexible operation the dong does not have the same credibility in the market as other more consistently targeted currencies which do not have a bureaucratic policy rate and has higher credibility.

Due to the lower level of credibility from ‘flexibility’, market participants can be spooked, analysts say.

“Meanwhile, customers with foreign currency income have delayed selling them to the credit institutions, making the balance of foreign currency supply and demand unfavorable in the short term, putting more pressures on the exchange rate,” Quang also said.

Dollars have disappeared in the kerb market and people are buying gold in Vietnam. The SBV has also been forced to intervene in the gold market to narrow the gap between world and Vietnam gold prices.

Despite having a policy corridor in Vietnam, the rate is not strictly enforced through standing facilities, helping the SBV keep the exchange rate more stable than central banks that obsessively target the policy rate with printed money, sacrificing social stability and blowing asset bubbles for the sake of a couple of hundred basis points of short term rates.

Vietnam’s interbank rates have started to move up as liquidity is mopped up to stabilize money.

The overnight rate which was as low as 0.64 percent in early January has moved up to 3.93 percent by end May 2024. The 1-month rate which was

The three-month rate which was around 2.92 percent at end January has moved up to 5.44 percent by end May. The US dollar rate was still higher at 5.53 percent.

The IMF however has called for the sacrifice of the exchange rate to obsessively target the interest rate.

“The exchange rate regime should allow for greater flexibility and accompany a modernization of the monetary policy framework to equip it with more market based tools,” the IMF said in its September article IV consultation.

IMF’s Executive Directors also welcome “steps toward greater exchange rate flexibility and encouraged continued progress in this area, along with modernizing the monetary policy framework.”

The IMF also advocated busting the country’s hard won fiscal probity over the years for the sake of short term growth.

“…[G]iven ample fiscal space and limited room for monetary policy loosening, fiscal policy should take the lead in supporting economic activity if needed,” they said.

Following tax cuts during Covid pandemic fiscal authorities in the country has also got a taste for macroeconomic policy, observers say. A steep state salary hike is due in July.

Sr Lanka rupee is also facing weakness at the moment after a build up of excess liquidity up to April from balance of payments surpluses coming from weak credit.

Vietnam’s hard own fiscal gains and growth, has been achieved by providing a stability using the exchange rate is particular, like Singapore, though with a less effective operational framework.

The stability achieved since the mid 1990s in particular after late 1980s reforms to the SBV law, has so far brought big economic gains to the country, providing stability for foreign investors and making people appreciate the effect of free market reforms.

Related Vietnam’s stable exchange rate is key to FDI-driven export economy Moody’s says as Sri Lanka downgraded

Vietnam is under severe pressure from the International Monetary Fund to have a more flexible exchange rate with reduced credibility as part of efforts to railroad the country into a flexible inflation targeting regime.

Related

Vietnam rejects IMF-backed Sri Lanka-style policy in bid for monetary stability

IMF often claims the Vietnam Dong is ‘undervalued’ using statistical formula (EBA-lite) which other statistics such as Real Effective Exchange Rate shows it is ‘overvalued’.

The US Treasury also claims that currencies are ‘undervalued’ using statistics involving three key metrics. The charges are usually leveled against countries that maintain domestic stability through external anchoring and become export powerhouses.

The claim against the Dong however was dropped after Janet Yellen, a former Fed official was made Treasury Secretary.

RELATED Vietnam promises US it will not devalue, but dreaded Sri Lanka style ‘monetary modernization’ looms

It is not clear how the knowledge that existed about operational frameworks of note-issue banks and exchange rates among classical economists including Ricardo, Hume, Torrens and also Smith (who came from a well-functioning free banking geography) in the 19th century was lost leading to the ‘age of inflation’.

Austrian economists have blamed Keynesian macro economic policy in the Cambridge-Saltwater tradition for mis-understandings about note-issue banking, balance of payments troubles and monetary debasement in general that led to social unrest and high inflation over the last century.

Soon after the collapse of the Bretton Woods system due to the bureaucratic policy rate and growth or full employment policies, which led to the Great Inflation period classical economist Friedrich Hayek warned that no lessons had been learned soon after winning a Nobel prize.

“The whole theory underlying the full employment policies has by now of course been thoroughly discredited by the experience of the last few years,” he wrote in Choice in Currency, where he advocated breaking the money policy to escape the inflationist yoke of a single mis-targeted policy rate.

“Yet I fear the theory will still give us a lot of trouble: it has left us with a lost generation of economists who have learnt nothing else.

“One of our chief problems will be to protect our money against those economists who will continue to offer their quack remedies, the short-term effectiveness of which will continue to ensure them popularity.

“It will survive among blind doctrinaires who have always been convinced that they have the key to salvation.”

In addition to IMF advice on inconsistent exchange rate regimes, the State Bank of Vietnam is also facing pressure from the government including a Prime Minister’s directive to maintain credit growth.

Sri Lanka also broke like a matchstick with combined monetary and fiscal policy to drive growth between 2015 and 2022 after the IMF itself taught the island how to calculate potential output and the reserve collecting central bank started to narrowly target a policy rate between the corridor.

The printing money for growth as well as printing money (or debasing the currency through exchange rate policy) to drive up inflation has been legalized through a new IMF-backed monetary law, which dropped the central bank’s previous stability mandate. (Colombo/June16/2024)

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Sri Lanka appoints new Attorney General

ECONOMYNEXT – Sri Lanka’s President Ranil Wickremesinghe has appointed K A Parinda Ranasinghe PC as Attorney General.

He was appointed in terms of Article 61E (b) of the Constitution of Sri Lanka, the president’s media division said.

The new AG received the appointment from President Wickremesinghe at the Presidential Secretariat on Friday.

Ranasinghe is the 49th Attorney General of Sri Lanka.

He fills the post after the retirement of former Attorney General Sanjay Rajaratnam. (Colombo/Jul12/2024)

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Sri Lanka rupee closes stronger at 301.70/302.00 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed stronger at 301.70/302.00 to the US dollar on Friday, from 302.80/303.00 to the US dollar on Thursday, dealers said, while bond yields were up.

A bond maturing on 15.12.2026 closed at 10.90/11.00 percent, up from 10.85/95 percent.

A bond maturing on 15.12.2027 closed at 11.75/80 percent, up from 11.80/88 percent.

A bond maturing on 01.05.2028 closed at 11.90/12.00 percent.

A bond maturing on 15.09.2029 closed at 12.10/30 percent, up from 12.15/25 percent. (Colombo/Jul12/2024)

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Sri Lanka stocks close up, muted activity

ECONOMYNEXT – The Colombo Stock Exchange closed up on Friday, data on its site showed.

The broader All Share Index closed up 0.35 percent, or 41.71 points, at 11,843; while the more liquid S&P SL20 Index closed up 0.56 percent, or 19.20 points, at 3,454.

Turnover was low at 653 million.

“The market picked up a bit from yesterday but it’s still below the psychological 12,000 mark,” Softlogic Stockbrokers said.

“Local retail participation drove the market predominantly.”

John Keells Holdings Plc brought in Rs109mn to the turnover, and the share closed flat at 194.50.

Melstacorp Plc contributed in Rs104mn to the turnover, and the share closed flat at 85.00.

Sentiment around the banking counters was mostly negative. Sampath Bank Plc closed down at 77.00, closed flat at 101.25, and Hatton National Bank Plc closed flat at 195.25.

The top contributors to the ASPI were Commercial Bank of Ceylon Plc (up at 103.50), Bukit Darah Plc (up at 397.00), and Hayleys Plc (up at 101.00).

Foreign participation remained low as well. There was a higher net foreign outflow of 101 million.

“Foreign selling was seen on John Keells Holdings, and banking counters; Hatton National Bank Plc (down at 195.00), Pan Asia Banking Corporation Plc (down at 20.70), and Commercial Bank of Ceylon Plc.

There was selective foreing interest on the diversified financials sector, particularly in companies that had vehicle leasing portfolios. “We think this might be due to the news of the vehicle import ban possibly ending.”

LOLC Holdings Plc closed up at 440.50, People’s Leasing and Finance Plc closed up at 12.20.

Softlogic Holdings Plc which announced the date of its rights issue, closed up at 8.50. (Colombo/Jul12/2024)

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