Jun 30, 2014

Vietnam - Time bomb laid in foreign currency credit market

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VietNamNet BridgeThe dollar lending interest rate is lower by at least 3-5 percent annually than the dong interest rate, which is the reason for the sharp increase in the ratio of the dollar outstanding loans on dollar deposits from 84.3 percent in early 2014 to 99.5 percent in early May 2014.

Weaker liquidity – the imminent worry

A report of the National Financial Supervisory Council showed that by early May, while deposits in foreign currencies had decreased by 9.1 percent in comparison with the end of 2013, outstanding loans in foreign currencies had increased by 7.2 percent.

The report also noted that, since early April, the interbank dollar interest rate has increased from 0.3 to 0.5 percent annually.

Meanwhile, the dong interest rate curve has moved in the opposite direction: while dong-based outstanding loans increased by 2.6 percent, dong deposits increased by 3.5 percent, lowering the ratio of dong outstanding loans to dong deposits from 82.4 to 79.9 percent.

There exists a big gap between the dong and dollar lending interest rates. According to the State Bank, in the week of June 9-13, the dong short term interest rate hovered around 9-10 percent, with the long term interest rate at 10.5-12 percent per annum. Meanwhile, the dollar interest rates were 3-6 percent and 5.5-7 percent, respectively.

The low dollar interest rate obviously has made dollar loans more attractive.

The director of a major bank in Hanoi said he received a report indicating that the foreign currency loans of the whole banking system in the first half of 2014 surged by 10 percent over the end of 2013, but that the mobilized capital growth rate was negative during the same time.

The banker himself admitted that the high growth rate of foreign currency lending is not good at all.
“If banks’ loans exceed their capital mobilization capability, they will surely face a liquidity risk,” he said, adding that the State Bank is not equipped to offer support to banks which run into problems with foreign currency liquidity.

Banks slash dong interest rates, hesitantly

The State Bank has admitted to high risks for the national economy when businesses continue to prefer foreign currency loans.

At a government meeting in May, governor of the State Bank Nguyen Van Binh said that economists have urged the central bank cut the dong interest rate further, in order to ease the capital cost burden on businesses’ shoulders. However, Binh said, the State Bank still needs to consider the issue thoroughly, because this may affect the dong’s position in the long term.

The central bank, therefore, has had its reasons for maintaining a high dong deposit interest rate vis-à-vis the dollar interest rate. This has made it more profitable for people to keep dong, thus prompting them to sell dollars to banks in exchange for dong.


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