A rushed exit from greenbacks looming

The government last week further attacked dollar hoarders to restore confidence in the local currency.

Meanwhile, with Decision 750/QD-NHNN effective from May 1, the authority hiked reserve requirement for over-12-month dollar deposits from 2 to 4 per cent and 4 to 6 per cent for less-than-12-month deposits.

Tran Hoang Ngan, a member of Vietnam’s National Financial and Currency Advisory Council, said that those moves would have twin impacts on the forex market.

“On one hand, it will discourage people from keeping dollars. On the other hand, by lifting reserve requirement, dollar lending rates will go up, reducing borrowing demand. In short, those moves would address dollarisation,” said Ngan.

For instance, with non-term dollar deposit reserve requirement at 4 per cent, banks would have to give the authority $4 for each $100 mobilised.

According to an Eximbank executive, the moves were not out of the blue. “Dollarisation is a burning issue,” said the executive.

At the moment, local lenders are mobilising greenbacks at 5.5 per cent, per year.

Le Xuan Nghia, deputy chairman of the National Finance Supervision Council, expected that dollar holders would convert their dollar assets into dong. “This would provide substantial amount of dollars to the banking system,” said Nghia.

Ngan even forecasted that people might run away from holding dollars.

By end of 2010, according to Deputy Prime Minister Nguyen Sinh Hung, total dollar banking system deposits stood at $21 billion from corporates and individuals.

Earlier this month, the State Bank announced lending growth in the first quarter was estimated at 5 per cent, mainly led by dollar lending growth. Dollar credit growth hit 12.06 per cent while Vietnam dong credit growth stood at 1.43 per cent.

In late March, with Circular 07/2011/TT-NHNN, the State Bank took the first step to narrow the door for local enterprises borrowing dollars.

As a replacement for Decision 09/2008/QD-NHNN, this circular regulates that  only exporters with adequate future dollar sources can borrow dollars from lenders. Meanwhile, enterprises borrowing dollars for use within the Vietnamese market should convert to dong via a spot transaction upon borrowing.

Nguyen Thi Kim Thanh, head of Banking Strategy Institute, said that this tightening might be the first step toward entire abolishment of foreign currency credit in Vietnam’s banking system. “The coexistence of dollar and dong interest rates caused difficulties to the State Bank’s monetary management,” said Thanh.

Previously, according to Decision 09/2008/QD-NHNN customers were permitted to borrow dollars from commercial banks for three purposes instead of the eight previously - importing goods and services, settling pre-mature foreign debt and investing overseas.

According to the International Monetary Fund, if foreign currency deposits in the total money supply (FCD/M2) of any economy exceeded 30 per cent, it meant the economy was in dollarisation. In Vietnam, the ratio, after peaking at 41.2 per cent in 1991 due to hyper inflation, has been fluctuating between 20-30 per cent since then.