Firms face exchange rate puzzle

illustration photo

“Firms asked me should they take dong or dollar loans? I tell them if they have the greenbacks to pay off debts, they had better take on dollar loans to enjoy lower interest rates and I asked them to be cautious of the [dong-dollar] exchange rate risk by the year-end,” said economist Vu Dinh Anh.

Anh said if in the last four months of 2011 the consumer price index (CPI) growth averaged 1.96 per cent as seen during January-August, full-year CPI growth would be at least 23 per cent.

“The finest scenario is that the CPI average growth in the last four months will be tantamount to three recent months’ monthly average CPI growth of 1.06 per cent, driving 2011’s CPI growth to around 20 per cent,” Anh said, adding that with such growth, one could not expect the lending rate to drop lower than current average lending level of 18.6 per cent, per year.

“In this context, sourcing dollar denominated loans is more efficient then dong loans, however, firms face risks if the exchange rate escalates by the year’s end,” said Anh.

VPBank general director Nguyen Hung said the capital demands often picked up in the fourth quarter and banks faced low liquidity if they pulled deposit rates down.

“With a deposit ceiling of 14 per cent per year, plus obligatory reserve requirements and other sorts of expenses banks’ actual input costs came to 18-19 per cent per year, no banks will lower their lending rates to below 17 per cent, per year,” Hung said.

One of the 12largest commercial banks in the country VPBank just set aside VND3 trillion ($145 million) to lend businesses in agricultural, forestry and fisheries production and export and those operating in healthcare and education sectors with preferable lending rates of 17-19 per cent, per year, said Hung.

“Firms can hardly run at a profit and keep production and business activities stable even with such preferred lending rates,” said Dong Bang Trade Services Development Joint Stock Company director Pham Quang Trung.

Trung also worried that banks could not maintain the concessionary interest rate policy long-term since the CPI growth in the remaining months of the year remained unpredictable.

“I still advise firms to borrow dollar loans amid a stable exchange rate. However, firms were also warned of the exchange rate situation later in the year, particularly this year, as firms have hooked into dollar loans,” said Informatics and Applied Economics Research Institute director Dr. Dinh The Hien.

Commercial banks’ quoted dong-dollar exchange rates are VND20,830 (buying) and VND20,834 (selling).

According to Hien, with such quoted rates, firms taking dollar loans with an interest rate of 7 per cent, per year would be more beneficial than those sourcing dong loans with an annual interest rate of 19 per cent.

“If the exchange rate augments to VND21,754 per dollar, sourcing dollar and dong loans with the said interest rates will be the same in terms of interest rates. If the [exchange] rate further increases to VND22,500 per dollar by the year’s end, dollar loans’ actual interest rates will be at least 3.91 per cent, per year higher than those of dong loans,” Hien said.