VND supply unexpectedly short

The abnormally high overnight interest rate in the inter-bank market (up by 4-5%) has shown the serious shortage of VND after a lot of exertion by the State Bank of Vietnam to withdraw VND from circulation.

One of the reasons behind the VND shortage that experts have pointed out is the fact that the central bank limits buying state bank promissory notes from banks. Experts have voiced concern about the liquidity of valuable papers as commercial banks cannot sell them to get cash.

In principle, commercial banks seek short-term capital from other banks in the inter-bank market, or ‘knock on the central bank’s doors’ through open market operations.

In fact, the central bank bought VND500bil worth of 14-day bonds late last week to pump more cash into the market (the interest rate was 8.4% per annum, higher than the rate of 5.75% of the bonds issued on October 26). However, the move did not show satisfactory results.

In the inter-bank market, state-owned banks provide 70% of total capital. It is estimated that VND10tril worth of capital is being transacted every day on the market. The money from the central bank is coming in dribs and drabs, which cannot cool down the capital shortage and stop the interest rate hikes.

“If the central bank does not intend to pump money into circulation by buying back bonds commercial banks are holding, the interest rates may climb to the record levels of 15-16% per annum,” director of a bank said.

It seems that commercial banks have taken a wrong step by injecting too much money in bonds and other valuable papers, and now they cannot convert the papers into cash.

A foreign banker said that the 11-12% per annum interest rate on the inter-bank market should be seen as an overly high rate.

The overly high interest rate has raised the fear about the serious shortage of VND. As a result, no bank wants to lend money at this moment.

The VND shortage on the inter-bank market is believed to have bad impacts on other markets, including the government bond market and stock market.

Moreover, the valuable paper market will certainly become gloomier. The government bond bidding held late last week at the Hanoi Securities Trading Centre could not find a buyer of 3-year bonds worth VND500bil ($31.25mil) (7.8% in interest rate). Only 10% of 5-year bonds, worth VND1tril ($62.5mil), were sold at the interest rate of 8.3% per annum.
Nguồn: Vietnamnet