Deposit rates trigger dollarisation fears

Enterprises’ high dollar borrowing demand has fuelled dollar deposit hikes

SeaBank kicked off the rate race for dollar deposits in mid-January when it lifted its 36-month dollar deposit rate to 6 per cent from 5 per cent per year. 

In the wake of this move, other large-scale banks including Vietcombank, Eximbank and ACB hiked their maximum interest rate for dollar deposits to around 5 per cent per year from 4-4.5 per cent per year.

An executive from Vietcombank’s treasury department explained the bank was forced to raise the rate to attract customers.

“Of course, as a larger bank with a better reputation, Vietcombank can offer a slightly lower deposit rate than its smaller peers, but the gap should not be too wide. That’s why we had to follow the trend toward a higher dollar deposit rate,” said the Vietcombank executive.

Meanwhile, the smaller Vietbank pushed up their 6-12 month dollar deposit rate to 6.2 per cent last week. But Navibank is way out in front with its offer of 6.24 per cent per year for 12-month dollar deposits.

Vo Thi Sanh, head of Bank for Investment and Development of Vietnam (BIDV)’s of Assets Liabilities Management Division said the twin reasons behind dollar deposit hikes were high dollar borrowing demand and banks needing to increase mobilisation.

“With a large gap between Vietnam dong and dollar lending interest rates, enterprises are opting to borrow dollars, then sell them on for dong. Meanwhile, some banks have tried to mobilise more dollars, then convert these into dong,” said Sanh.

At the moment, banks are lending out at 15-18 per cent per year for Vietnam dong and 7-10 per cent per year for dollars.

Nguyen Thi Kim Thanh, head of the central bank’s Banking Strategy Institute, is worried that this fact could cause additional dollarisation in Vietnam.

“This would push up the ratio of dollar denominated deposits to total deposits in the banking system. Though the exchange rate fluctuation risk might be well controlled in 2011, dollarisation levels should be brought down rather than pushed up,” said Thanh.

The ratio of dollar-denominated deposits to total deposits in the banking system rose from 33 per cent in 1997 to 36.6 per cent in 2000. The ratio was 41 per cent in 2001 then gradually dropped to the current levels of more than 20 per cent.

With dollar-denominated deposits making up over 20 per cent of total deposits in the banking system Vietnam’s economy is undoubtedly dollarised, according to the International Monetary Fund.

Dollarisation makes monetary policies less effective because of the existence of substantial dollar amounts in supply.

According to Robert Prior-Wandesforde, Credit Suisse Group AG’s economist for India and South-East Asia, there is a sizeable risk that Vietnam’s inflation will rise even higher in the short term, leading to further deterioration in trade.

“Thus the Vietnam dong will come under renewed downward pressure, in our view. We are looking at a further 5 per cent depreciation of the Vietnamese currency against a generally weak US dollar during the course of 2011,” said Prior-Wandesforde.