The State Bank (SBV) report shows that by the end of the third quarter of 2017, the forex reserves had reached $45 billion, an increase of $6 billion over the end of 2016. 

As such, SBV bought $11 billion in 2016 and $6 billion in the first nine months of the year.

The movements in the monetary market in the last two years explain why Vietnam’s forex reserves have been increasing rapidly.

First, Vietnam has joined a number of FTAs, both bilateral and multilateral, which gives foreign investors one more reason to relocate their production shops from China to Vietnam to take full advantage of tariff cuts. 

This has helped FDI in Vietnam gain two-digit growth rates in recent years.

Second, SBV has been pursuing a policy on managing the exchange rate in accordance with market rules. Non-market exchange rate fluctuation is one of the risks that foreign investors are most concerned with. 

Third, the government is speeding up the equitization of SOEs and divestment from enterprises in key business fields (electricity, banking, logistics and aviation), thus having attracted foreign portfolio investment capital flow.

Vietnam needs a gradual sustainable increase in forex reserves, rather than a shocking increase as seen in the last two years.

However, analysts say that cash abundance is always a ‘double-edged knife’.

The rapid increase of forex reserves means that a big amount of foreign currencies have been flowing into Vietnam, and that a large amount of dong has been pumped into circulation by the central bank.

With $17 billion inflowing into Vietnam from early 2016 to now, the dong/dollar exchange rate has been controlled, ensuring stability and support of exports. 

The interbank interest rate has been maintained at a reasonably low level, while bank liquidity is high. These are all important factors that have prompted foreign investors to flock to Vietnam to seek opportunities.

However, analysts warned that the massive landing for foreign investors in Vietnam may also bring risks.

When Vietnam joined the WTO in 2007, it witnessed a wave of foreign investors flocking to the country. 

This helped Vietnam’s GDP soar by 8.46 percent. However, this was associated with the high inflation rate, at 2-digit rate. The inflation rate climbed to a record high of 18.58 percent in 2011.

The finance market boom at that moment led to capital, both domestic and foreign, flowing to risky sectors such as real estate and securities. This caused a crisis with a huge amount of bank bad debts, which has still not been settled.

Vietnam’s forex reserves soared sharply in 2007 and 2014, but later fell rapidly.

RELATED NEWS

Vietnam forex reserves hit all-time high

Vietnam Central Bank puts forex reserves at US$38 billion