Vietnam implementing de-dollarization policy

Effects on financial institutions and enterprises

Over the past few years, the State Bank of Vietnam (SBV) has been trying to reduce the number of transactions conducted in US dollars, either for domestic payments or foreign trade.

In April, short-term loans used for outward remittances for imported goods or services for business and production for domestic demand have been stopped.

Most recently, Circular No.42/2018/TT-NHNN dated October 1 revealed that the SBV would prohibit foreign currency loans to importers in both the mid- and long-term. This decision applies for domestic and international lenders. The SBV aims to reduce the proportion of foreign currency in total outstanding debts below 7.5 per cent next year, and below 5 per cent in 2030.

The success of the State Bank of Vietnam's de-dollarisation policy is apparent in the reduced impact of USD fluctuations

Speaking at a press conference earlier this month, deputy governor of the SBV Dao Minh Tu emphasised that this policy is meant to combat dollarisation in the economy, making Vietnam shift foreign currency from mobilisation-lending into buying-selling.

At first, the foreign currency lending policy was designed in a bid to assist local importers and producers by offering lower borrowing costs in comparison to VND borrowing. For example, financial institutions often charge interest rates for lending at around 2.8-4.7 per cent for short-term dollar loans compared to 6-9 per cent for short-term VND loans. In case of mid and long-term loans, the lending rate stood at around 9-11per cent for VND loans, which is twice as much as USD rates.

In terms of the effects on lenders’ activities, Tharabodee Serng-Adichaiwit, senior vice president and general manager at Bangkok Bank Vietnam, told VIR that banks may not face many obstacles since they can offer VND loans instead. Many banks were prepared even before the official Circular was released.

“Customer loan activities remain stable. This is due to a clear roadmap of application from the SBV which gives both banks and customers time to prepare and adjust their plans,” said Tran Thi Nguyet Anh, director, head of corporate at the southern branch of HSBC Vietnam.

In the case of enterprises, Nguyen Van Kich, chairman of the board of directors of Cafetex corporation, expressed concerns that the cheaper price of imported goods would impede the demand for domestically produced goods.

Tharabodee Serng-Adichaiwit, senior vice president and general manager at Bangkok Bank Vietnam “From my observations, SBV has done a very good job to de-dollarise the economy in the past 5-6 years, as we can witness that the USD does not have the same impact on the Vietnamese economy as it did in the past.The SBV policy has prevented Vietnam from facing a financial crisis that happened in Thailand in 1998. Furthermore, the VND has been the main means of payment and has also become one of the most stable currencies in the region.”

"Firms are usually holding to borrow on to US dollars which are more attractive thanks to lower interest rates. This new policy, however, adds to firms’ expenses because businesses have to borrow VND and exchange it into foreign currencies to pay for offshore imports,” said Kich.

Tharabodee Serng-Adichaiwit pointed out that enterprises can still make up for the higher cost.

“Big firms with strong status can alternatively borrow directly from offshore in foreign currency which is subject to registration with the SBV. Smaller firms can still earn 1-1.5 per cent gain from VND depreciation per year to compensate for the higher costs,” he added.

Currently, many banks said they are ready for businesses to convert loans into VND and buy foreign currencies. In addition, they also offer many financial solutions, such as deferred payment letters of credit or consultancy to help businesses improve the efficiency of financial management.

“Stopping foreign currency lending will not affect the revenue and profit of enterprises,” a representative from VIB bank said.

“The new regulation would level the playing field between enterprises producing for domestic consumption and those importing for export production,” economist Nguyen Tri Hieu said, adding that the new policy is expected to boost the domestic materials industry.

Reasons for de-dollarisaton

Economist Hieu believed the advantages of de-dollarisation would outweigh disadvantages, saying that it is necessary to stabilise the forex market and exchange rate.

“The trend is likely to continue because the infrastructure for transactions in alternative currencies is improving,” Hieu stressed, “The exchange rate is stable, foreign currency reserves are high, and the SBV can balance the foreign currency position, so it is high time to restrict and stop offering foreign currency loans.”

High dollarisation, at first glance, might make Vietnam an attractive destination for foreign capital, but it also leaves the country vulnerable to dramatic shifts in the international economy.

“The SBV, on the other hand, could lose its ability to directly impact the Vietnamese economy, including its right to control monetary policies or any form of exchange rate regime. Plus, if Vietnam is still a fully-dollarised economy, what will happen if the country runs out of foreign currency reserves?” an industry insider cautioned.

Echoing this view, Tharabodee Serng-Adichaiwit of Bangkok Bank Vietnam told VIR that dollarisation has been one of the main reasons of currency instability in Vietnam.

“From my observations, SBV has done a very good job to de-dollarise the economy in the past 5-6 years, as we can witness that the USD does not have the same impact on the Vietnamese economy as it did in the past. The SBV policy has prevented Vietnam from facing a financial crisis that happened in Thailand in 1998. Furthermore, the VND has been the main means of payment and has also become one of the most stable currencies in the region,” he explained.

Other market watchers also warn of illegal money trading by unregulated underground firms buying or selling foreign currency.

“Foreign currency trading may involve illegal activities, making it more difficult for the government on controlling exchange risks. This could disrupt the financial market and jeopardise Vietnam’s financial and social stability,” said banking expert Dang Ngoc Duc of National Economics University.

Vietnam is not alone in its bid to de-dollarise. China and Russia, for example, have been very aggressive on this front. The two countries are also acting on a pledge to shrink the role of USD in international trade as tension sour.