Vietnam's central apparently does not have space to lend to the government since the country's foreign exchange reserves is too low, according to HSBC.
“Any decision on the part of the government to borrow from FX reserves would risk upsetting the stability of the dong,” HSBC said in a statement on Friday.
The government has proposed plans
to borrow from its foreign exchange reserves after struggling to issue debt in the bond markets. Seven bond auctions failed in May alone.
HSBC, however, warned that financing government projects with FX reserves would leave the dong in precarious position.
Vietnam's US$35 billion reserves cover only 2.5 months of imports, which is already low by most conventional measures, even compared with other economies such as Bangladesh and Sri Lanka that have similarly managed FX regimes, said HSBC. The traditional benchmark for FX reserves is equivalent to three months of imports.
The State Bank of Vietnam's policy of maintaining a narrow daily trading band of +/-1 percent of mid rate for the US dollar and the dong means reserves are an essential tool in ensuring exchange rate stability, HSBC said.
Moreover, trade deficit
of $3.3 billion year to date will put further strain on FX reserves and the dong, the bank said.
Besides, the possibility of FED rate hikes later this year means there could be episodes of the dollar strength that would force the SBV to call upon its reserves. The central bank earlier said it would not devalue
the dollar-dong rate by more than 2 percent this year.
“If the central bank’s foreign exchange reserves are put to use financing government projects this would leave the central bank with less ammunition to help it stick to its commitment and maintain credibility,” said HSBC.
The Ministry of Finance has proposed using FX reserves to fund investment amid subdued government bond auctions, said HSBC.
Of the VND250 trillion ($11.9 billion) financing needs in 2015, the ministry has successfully issued only VND 66 trillion year-to-date, equivalent to 27 percent.
One of the causes of this dampened enthusiasm is Resolution 78, which became effective in 2015 and stipulates that the State Treasury can issue bonds only with tenors equal to or longer than five years.
"It appears the market does not have the appetite to buy such unprecedented amounts of long-dated bonds," HSBC said.
It hopes Vietnam to changes to Resolution 78, which will give the ministry more flexibility in its bond issuance.
“If Resolution 78 is not amended at the National Assembly meeting, we still do not expect the government to pass the legislation to enable it to borrow from FX reserves,” it said. “The risks are simply too great.”