Lending costs again prove a headache

High borrowing costs have been a big burden to firms in the face of economic uncertainties. In fact, firms preferred taking dollar loans to enjoy softer interest rates.

“We export up to 80 per cent of products. Currently, lending rates are 5.6-6 per cent per year for dollar loans using as working capital and 7-8 per cent to loans for investment which are much lower than over 20 per cent per year dong lending rates. Hence, taking dollar loans is smarter for our firm,” said Thien Nam Textile-Garment Company director Tran Dang Truc.

Truc said since imported materials accounted for a big share in the product structure, volatile input material costs were hurting the firm.

Deputy director Nguyen Khoa Van at Anh Khoa Company Limited  - which produces and trades in garment products, assumed getting dollar loans would not be a top choice if firms were not reliant on imported materials.

Van argued that foreign firms, based in Vietnam’s industrial zones or export processing zones, sell garment accessories and materials into local market. His firm bought 70 per cent of material demands from such firms using dong.

“We then sell dollars gained from export contracts to banks. That is more beneficial to us,” said Van.

Van said that labour intensive garment textile sector usually paid labourers in dong and payrolls account for around 30 per cent of production costs, hence it would be better to take on dong than dollar lending.

Industry experts assumed dollar lending would be more risky than dong lending on the back of shaky exchange rate. Estimates show that resuming the exchange rate stays at VND21,000 per dollar in early year, then augmenting to VND23,000 per dollar by the year’s end, the appreciation of dollar against dong currency alone is tantamount to 18 per cent interest rate per year.

Interest rate differences of buying and selling dollars is another matter of concern to firms when sourcing dollar loans. “Getting dollar loans will be beneficial to export firms having stable dollar raising sources. If firms then have to convert dong into dollars to pay up debts they should take into account their possible loss derived from exchange rate differences, ” said Truc.

A director of a Ho Chi Minh City-based bank said: “In the current context, getting dollar loans is generally better than dong loans. The matter is could firms be accessible to the greenbacks since in fact banks just lend firms with import-export activities and having steady dollar raising sources.”