Interests rates set to be weapon of choice

Banks assumed less disparity between dong and dollar deposits after the dong mobilising cap was scaled down to 7.5 per cent, per year from March 26, 2013 has put pressure on the dong-dollar exchange rate and prompted part of depositors to convert from dong to dollar hoarding.

Thereby, to increase exchange rate stability, the State Bank could consider further reducing the interest rate imposed dollar deposits.

The current cap of dollar deposits is 2 per cent, per year. 

According to State Bank Ho Chi Minh City branch deputy director Nguyen Hoang Minh, dollar deposits at city-based banks contracted 8 per cent in April, but the pace was slowing down in May and June.

In fact, banks’ outstanding loan balances in dollars fell sharply after the State Bank enacted Circular 03/2012/TT-NHNN which contained stringent lending requirements to limit clients of foreign currency loans in a bid to reduce demand for foreign exchange and the pressure on the exchange rate.

Circular 03 on foreign currency lending by domestic credit institutions and foreign bank branches for resident borrowers was enacted on March 8, 2012 and came into force from May 2, 2012.

This was evidenced by the fact that by the end of May 2013 while credit in dong hiked 5.48 per cent dollar credit slid 8.41 per cent.

Bank executives then proposed the State Bank extend foreign currency supply to firms especially importers having the demand, particularly in later months of the year.

A Ho Chi Minh City based electro-cryogenic trading firm director said the company often had to borrow dollars outside of banks at high interest rates to feed the high demand for importation during summer since it was illegible to source dollar loans from banks.

The executive at Ut Xi Seafood Processing, based in southern Soc Trang province, said the company often took loans in dollars for lower interest rates at 4-5 per cent, per year against at least 10-12 per cent, per year of dong-denominated loans.

Citibank Vietnam chief executive officer Brett Krause assumed the policy on anti-dolarisation and restricting gold trading in the market had generated upbeat outcomes, but it had affected dollar loan provision to import firms.

“Some of our local customers have shifted into borrowing dollars in foreign markets,” said Krause.

Krause proposed the State Bank consider scaling down current dollar interest rates, arguing that exchange rate volatility in the past two weeks was driven by shorter gap in dong and dollar deposits. Thereby, people would shift into depositing in dollars if the dong mobilising rate continued to fall.

In this regard, State Bank Governor Nguyen Van Binh said the revision of current dollar mobilising cap would take place, but at what time and level need further consideration.