"Grain bin" for foreign exchange reserves
In 2012, Vietnam's foreign exchange reserves increased sharply again. This value is not just limited to monetary policy, but has national significance.
The story goes that some people in the banking industry occasionally recall an "anecdote" from many years ago: at a meeting, a department-level leader suggested that historically, Vietnam had never had a single foreign currency in its state foreign exchange reserves, and there was no need to have any.
According to statements or pronouncements from some state leaders, the current level of foreign exchange reserves is sufficient to cover nearly 12 weeks of imports for the economy.
Upon receiving this information, many attendees at the meeting, including representatives from several international organizations, were astonished. After all, a country with no foreign exchange reserves, or with very weak reserves, faces numerous risks…
For example, in 2008, amidst the global economic crisis, Vietnam's economy faced concerns among foreign investors and pressure from a potential reversal of foreign capital flows. In this context, for the first and only time to date, detailed figures on the state's foreign exchange reserves were published.
Late in the afternoon of June 19, 2008, following the Prime Minister's directive, then Minister of Finance Vu Van Ninh chaired a televised forum, together with the State Bank of Vietnam, the Ministry of Planning and Investment, the Ministry of Industry and Trade (as it was then called), and international organizations such as the World Bank (WB), the Asian Development Bank (ADB), and the International Monetary Fund (IMF), in coordination with Credit Suisse.
The live broadcast, connecting investors in Hanoi, Ho Chi Minh City, Hong Kong, and Singapore, was conducted from the World Bank's office. During the event, then-Governor of the State Bank of Vietnam, Nguyen Van Giau, announced that Vietnam's net foreign exchange reserves stood at $20.7 billion.
For the first and only time to date, the foreign exchange reserves have been disclosed in this manner. While classified as a national secret, the circumstances necessitated its release. This information is considered significant given the concerns of foreign investors. With such a scale, Governor Nguyen Van Giau affirmed at the forum: "It is sufficient to intervene in the market."
The above example shows that state foreign exchange reserves have significant weight, and this is not limited to monetary policy alone.
In 2012, after a rapid and sharp decline following the announcement of the aforementioned $20.7 billion figure, Vietnam's foreign exchange reserves rebounded strongly. The amount purchased this year is estimated at over $10 billion. Overall, several domestic and foreign organizations estimate that the total may now exceed $20 billion.
According to statements or pronouncements from some state leaders, the current level of foreign exchange reserves is sufficient to cover nearly 12 weeks of imports for the economy.
Calculating by import weeks is a benchmark, as over $20 billion is significant for Vietnam, but it might not necessarily meet the minimum requirement for Thailand. This calculation reflects a country's ability to support international payments through its foreign exchange reserves, or its ability to hedge against the risks of capital flight reversals. According to the IMF, a country with foreign exchange reserves equivalent to 12-14 import weeks is considered to have sufficient reserves.
With that criterion in mind, Vietnam could be more satisfied at the end of 2012 having increased the size of its foreign exchange reserves. And more importantly, its value in depth.
One expert jokingly told VnEconomy: "No matter what you brag about, people will still look at your bank account. Your foreign exchange reserves will be considered accordingly."
The expert's point is that when the Vietnamese government and businesses go to the international market to negotiate for capital, partners will pay attention to the country's strength, and a "grain of grain" is foreign exchange reserves. This is similar to one of the many criteria to ensure better attraction of foreign investment.
A larger and more significantly increased foreign exchange reserve will contribute to improving national creditworthiness. National creditworthiness is also an important reference point when international credit rating agencies assess businesses. A better rating means lower borrowing costs. This is a clear and far-reaching value.
In 2012, Vietnam's foreign exchange reserves increased significantly, showing a marked improvement. However, in September 2012, Moody's downgraded Vietnam's credit rating, with the most prominent concern being the increasing bad debt in the banking system.
Let's consider this: assuming that bad debts, foreign exchange reserves, and USD/VND exchange rate fluctuations remain as unstable as they were in the previous few years, how much lower would the country's credit rating fall?
Conversely, if foreign exchange reserves continue to increase in 2013 and the bad debt problem is handled better, then there could be optimism about the prospect of a credit rating upgrade. The remaining question is whether that "if" is achievable.
According to Tinkinhte-HV
