Dollar lending spells trouble

Dollar lending hiked 22.2 per cent in 2011’s first half, 2.4-fold more than capital deposit rates, while dong lending surged just 2.72 per cent. What is your comment?

By nature surging dollar lending is a sort of financial dollarisation when dong-denominated debts and assets are superseded by dollar-based debts and assets.

Financial dollarisation will provide individuals and businesses with a vehicle to shield from inflation threats, enhance ability for international integration, abate transaction costs and facilitate trade and investment. It also helps narrow the gap of the dong-dollar exchange rate in the official and parallel markets. Nonetheless, this phenomenon also entails multiple challenges to the economy.

What are these challenges?

Dollar lending was mostly due to high dong lending rates. If the State Bank pumps the dong currency into the market via the open-market-operation window to absorb dollars, it may cause inflation to roar. Then to lure the dong, the State Bank will have to sell valuable papers to credit organisations. The cycle may further dampen the dong credit tension already visible within the banking system. From the part of businesses, it is quite risky when firms source dollars to pay back debts. Besides, since firms often take short-term dollar loans, the demand for dollars may spike by the year’s end which might require the State Bank to revise the dong-dollar exchange rate in the face of dollar supply-demand imbalance.

Relative to the economy, businesses’ growing appetite for dollar lending may badly influence central bank’s de-dollarisation policy stance.

Reality shows that firms not only source dollar loans for import-export payments. Part of the loans were converted into dong to pump into production and business activities.

This was counter to central bank’s efforts to withdraw dollars from business transactions for de-dollarisation target.

As for banks, the State Bank is reportedly drafting a draft circular requiring banks to lowering the foreign currency/owner capital ratio to 20 per cent from current 30 per cent to help it consolidate dollar holdings.

What is your comment on the foreign exchange market situation in late 2011?

The State Bank will have to raise dollar reserves to take initiative in managing [dong-dollar] exchange rate and monetary policies as well as keeping order in the forex market. Since both the foreign direct investment and overseas remittance flows saw a decline alongside continuing deficits in the current account balance it is not easy to achieve macroeconomic stability in the near term.

The dong currency may be further depreciated in the second half of the year to spur exports and revive the economy. Whether it happens or not also depends on central bank’s determination to curb dollarisation and inflation.

How can forex market tension be alleviated?

Surely, a policy package targeting macroeconomic stability, lowering inflation and trade deficit must be further stimulated. A positive signal was the July’s trade deficit dropping to $160 million, a record low in the past 27 months.

Market-based measures should be handled on a cautious manner such as dollar lending should be only allowed in some specific areas and gradually putting an end to dollar deposits and lending.