The Reason Why SBV Hasn’t Raised the Policy Rates

Local currency (LCY) government bond yields in Viet Nam rose for all tenors between 15 June and 15 August, leading the entire yield curve to shift upward. Bond yields for maturities of 3 years or less climbed the most, rising an average of 81 basis points (bps), while yields for maturities of 5 years or more gained an average of 23 bps during the review period. The yield curve flattened as yields at the shorter-end rose at a faster pace, causing the spread between the 10-year over 2-year tenors to narrow from 121 bps on 15 June to 54 bps on 15 August.

Bond yield movements in Viet Nam bucked the regional trend as it was the sole market in emerging East Asia where yields rose across the curve. The rise in yields was largely influenced by the State Bank of Vietnam (SBV) opting to utilize open market operations to manage the money supply and stabilize the exchange rate.

The SBV is aiming to keep interbank rates elevated by setting an interest rate floor in its open market operations to maintain a spread between VND-denominated loans and USD-denominated loans. This move also indirectly contributed to the uptick in yields across the curve.

In recent months, the central bank has resumed issuance of central bank bills and limited credit growth quotas for banks, withdrawing liquidity from the market.

The uptick in yields was also partly driven by Viet Nam’s strong economic performance in the second quarter (Q2) of 2022. Real gross domestic product (GDP) growth climbed to 7.7% year-on-year (y-o-y) in Q2 2022 from 5.0% y-o-y in the first quarter (Q1) of 2022, the fastest pace to-date and higher than the government’s full-year target. Economic growth was underpinned by the recovery in exports and growth across all industry sectors.

Amid the strong GDP growth, the Ministry of Planning and Investment revised upward the 2022 growth target to 7.0% from 6.0%–6.5%.

The SBV has yet to raise policy rate unlike its peers in emerging East Asia, preferring to utilize open market operations to achieve its goals. Consumer price inflation has been relatively tame compared with that of other regional markets. Although inflation has been inching up in recent months, it has remained below the government’s limit of 4.0% for 2022.

Consumer price inflation eased from 3.4% y-o-y in June to 3.1% y-o-y in July and 2.9% y-o-y in August. The government is confident that inflation will not exceed 4.0% this year.

Size and Composition

The LCY bond market’s growth soared to 8.1% quarteron-quarter (q-o-q) to reach a size of VND2,315.9 trillion (USD99.5 billion) at the end of June. Growth was faster than the 2.4% q-o-q expansion in the prior quarter. The faster growth was contributed by both the government and corporate bond segments. Relative to the same quarter in the previous year, the bond market expanded 31.6% y-o-y in Q2 2022, up from the 29.2% y-o-y expansion in Q1 2022.

The LCY bond market remained dominated by government bonds, which accounted for 70.2% share of the total bond stock at the end of June. The remaining 29.8% share was accounted for by corporate bonds whose share inched up from 29.4% in Q1 2022.

Government bonds. The outstanding size of Viet Nam’s LCY government bond market reached VND1,626.2 trillion at the end of June on growth of 7.4% q-o-q. Much of the growth was contributed by central bank bills, which grew substantially during the review period.