Money market changes course unexpectedly
In this article (5)
The money market has been seeing unexpected happenings in the last two weeks. Until two weeks ago, the liquidity of the banking system had been in a state of tension because lending was higher than mobilized capital. According to the National Finance Supervision Council, while lending increased by 5.2 percent, mobilized capital increased by 3.7 percent only in the first four months of the year.
However, the money market has unexpectedly reversed with liquidity considerably improved. The interest rate performance in the interbank market last week was different from the weeks before when it decreased sharply from 4.7-4.9 percent to 3.9-4.1 percent for overnight loans (O/N).
In OMO (Open Market Operations), no commercial bank registered to borrow capital from the State Bank on May 19, which was the first time since the beginning of the year. The average balance in OMO, which was always over VND35 trillion, has dropped to VND4 trillion.
A BVSC report shows that the banking system’s liquidity has returned to a surplus state.
Where’s the cash flow coming from?
In theory, the sudden reverse in the two markets would occurs only if the State Bank (SBV) pumps capital into the market, and the quickest way for SBV to support liquidity is pumping capital through OMO.
However, the scenario did not occur as the outstanding balance of the banks on OMO is on the decrease and is nearing zero next week.
In the second scenario, SBV might have bought a big volume of foreign currencies from the market. This could be the foreign direct investment (FDI) flow, foreign portfolio investment (FPI), or foreign currency capital from domestic commercial banks.
“However, analysts don’t think this could happen because it was nearly impossible for foreign investors to disburse more than $1 billion within one week.”
However, analysts don’t think this could happen because it was nearly impossible for foreign investors to disburse more than $1 billion within one week.
Meanwhile, the foreign currency buy price quoted by SBV is now at VND22,675 per dollar, far lower than the prices in transactions made at commercial banks, at VND22,700 per dollar.
The third scenario is the most likely one at this moment. SBV might have refinanced commercial banks through VAMC special bond discounts. And the VAMC special bond discount rate must be lower than the interest rate on OMO.
With the total VAMC bond balance of up to VND280 trillion, the discount of VND35-40 trillion, or 13 percent, will not be a concern for the system.
If the third scenario is true, many questions will be raised. How much has SBV pumped into the market, to which banks and at what interest rates? Will SBV continue pumping more capital? Which criteria do banks need to have to be refinanced?
Questions & Answers
Q.What was the previous state of liquidity in the banking system before these recent changes?
What was the previous state of liquidity in the banking system before these recent changes?
Until two weeks ago, the banking system's liquidity was under tension because lending had increased by 5.2 percent, while mobilized capital only rose by 3.7 percent in the first four months of the year.
Q.What was the interest rate for overnight loans in the interbank market last week?
What was the interest rate for overnight loans in the interbank market last week?
Last week, the interest rate for overnight loans in the interbank market decreased sharply from 4.7-4.9 percent to 3.9-4.1 percent. This marked a significant change from previous weeks.
Q.Why is the theory of the State Bank pumping capital through OMO not considered the reason for improved liquidity?
Why is the theory of the State Bank pumping capital through OMO not considered the reason for improved liquidity?
The theory is not considered because the outstanding balance of banks on OMO is decreasing and is expected to be near zero next week. No commercial bank registered to borrow from the State Bank on May 19.
Q.What is the most likely reason for the sudden improvement in the money market's liquidity?
What is the most likely reason for the sudden improvement in the money market's liquidity?
The most likely reason is that the State Bank might have refinanced commercial banks by discounting VAMC special bonds. This scenario is considered more plausible than other possibilities presented.