USD set to flood a parched market

Hiking foreign reserve requirement will increase US dollar lending rates

Tran Hoang Ngan, a National Advisory Council for Financial and Monetary Policy member, said that the council was discussing hiking the reserve requirement ratio for dollar-denominated deposits.

“It is expected the ratio could be hiked this week,” said Ngan.

Le Xuan Nghia, vice chairman of the National Financial Supervisory Committee, called for a hike in the reserve requirement ratio.

“This is the best way to increase dollar supplies to the market. By hiking the reserve requirement, local banks will have to lift its dollar lending rates. Higher lending rates will reduce dollar borrowing demand,” said Nghia.

At the moment, reserve requirement ratio is 4 per cent for dollar deposits of less than 12-month term and 2 per cent for over 12-month term deposits.

“For instance, if the ratios are lifted to 7 and 5 per cent respectively, banks will have to lend at more than 10 per cent, per year. That level would discourage borrowers. By then, banks would have to cut dollar mobilising rates.

“The larger gap between Vietnam dong and dollar deposit rates would push people to convert dollars to Vietnam dong. In this process, the dollar supply will increase,” said Nghia.

On March 1, Prime Minister Nguyen Tan Dung called state-owned corporations for selling dollars to banks.

Deputy Prime Minister Nguyen Sinh Hung said total dollar denominated deposits in the banking system stood at $21 billion from corporates and individuals.

According to a BIDV official, once the prime minister’s order was executed, the banking system could have at least additional $2-3 billion immediately. In BIDV alone, the state-owned corporations’ dollar deposits reached $600 million.

Nguyen Thanh Toai, deputy general director of Asia Commercial Bank, said that this move would be an appropriate measure to cure the forex market.

By the end of last week, in the black foreign exchange market, the exchange rate was recorded at VND21,485 per dollar. Meanwhile, in the interbank market the VND/USD exchange rate stayed at VND20,877 per dollar.

Nghia expected that with the strong measures, the dollar supply would increase more than enough to cover the trade deficit.

Vietnam’s trade deficit came in below $1 billion for the second straight month in February, marking a sharp improvement from a year ago. The deficit came in at $950 million, a little larger than the $877 million booked in January but notably smaller than the $1.3 billion reported in February 2010.