Vietnam

Overall, indicators show that Vietnam's short-term financing risk is sensitive, reflecting declining foreign exchange reserves and import cover, as well as high credit growth. With efforts to ensure stability in the dong-USD exchange rate, foreign exchange reserves in Vietnam have fallen, and the ratio of money supply M2 to foreign exchange (FX) reserves increased from 529% at the end of 2021 to currently about 700% (a ratio below 400% is considered adequate). Likewise, the number of months of imports that is covered by FX reserves decreased from 3.9 in 2021 to 2.7 in Q1 2023. A heavily managed exchange rate regime so far sustained the risk of a large depreciation. However, if external demand conditions were to deteriorate and FX reserves to fall further, the central bank may at some point no longer be able to defend the dong.

Real domestic credit growth has remained elevated. It showed a downtrend at the beginning of 2023, dropping from nearly +14% y/y in January 2022 to +6.6% y/y in January 2023. However, it has picked up again since then as inflation has been easing and the State Bank of Vietnam (SBV, the central bank) began relaxing monetary policy in March-May 2023 by reducing the discount rate from 4.5% to 3.5% and the benchmark refinancing rate from 6% to 5% to support economic growth after a weaker performance from the external sector. On the one hand, these policy moves are alleviating an ongoing credit crunch in the property sector, where many firms are facing repayment and refinancing difficulties, leading to an increasing risk of bad debts in the banking sector. On the other hand, continuously rising credit will raise private sector debt-sustainability risks if the economy slows down more than expected.