Forex Concerns Worsen

In spite of being warned against exchange rate risks from borrowing dollar loans, many companies are still scrounging the greenback for short-term benefits. A sharp rise in foreign currency credits is posing a threat to macroeconomic stability, causing an unbalance in foreign currency supply and demand, and strengthening the favour of USD although it is depreciating against its peers all over the world.

 

As interest rates of VND loans have soared to 22 - 24 percent per annum and borrowing conditions are getting more difficult, many companies opt for dollar loans with annual interest rates of 6 - 8.5 percent, even as low as 3.8 percent at the Vietnam Bank for Investment and Development (BIDV). Given relatively stable exchange rates as now, the differential in interest rates is extremely attractive to any borrowers. The differential of 14 - 16 percent between USD-denominated loans and VND loans increases the interest in greenback. Even risks with USD loans are more comfortable than VND-denominated ones.

 

In the first months of this year, USD/VND exchange rate hovered at VND20,500 - VND20,600/ USD, boosting the demand for USD credits. A general director of an import export company pointed out that if his company borrowed US$400,000 or an equivalent of VND8.25 billion, his company would pay nearly VND55 million of interests a month for dollar loans but VND145 million for dong loans (given interest rate of 21 percent per annum).

 

When companies exchanged USD for VND to fund production and business activities, they will have to wait for future collection of dollars to repay the debts. Even if they are uncertain about the future collection of the foreign currency from goods sold, they still want to borrow USD because of immediate benefits seen from this approach [in relation to VND borrowing]. They can sell USD to take VND to deposit at banks to enjoy interest differentials. Hence, some companies are reportedly borrowing more USD than they need.

 

Banks are also interested in lending dollars to companies at 6 - 7 percent per annum while deposit rates are capped at 2 percent [the State Bank of Vietnam (SBV)’s regulations]. However, lenders are breaking the cap to attract more dollars in the same way they do with VND deposits. Rates will be fixed at 3 percent per annum for deposits of over US$5,000 and 4 percent for deposits worth over US$10,000. Many banks are actively soliciting their customers to swap demand deposits into timed deposits. USD lending rates have also accelerated rapidly, from 5-6 percent per annum to 8.5 percent at present in consideration of deposit rates climbing to 3.5 - 4 percent. As both banks and enterprises prefer borrowing and lending in USD, foreign currency credits have soared this year.

 

According to the State Bank of Vietnam (SBV), foreign currency credit growth was 13 percent in the first 6 months of 2011 while the rate in local currency was just 3 percent. SBV HCM City said the credit growth in the largest city of Vietnam was faster than deposit growth in the first half of this year. Specifically, total outstanding loans rose 6.67 percent from the end of 2010. VND-denominated credits increased just 2.14 percent but foreign currency credits surged 18.77 percent.

 

The SBV has reported to have purchased some US$4 billion but the exchange rate remains stable because of abundant supply. In reality, the quicker turnover of US dollars from banks to companies and vice versa is giving rise to supply growth. Or in other words, there is no new source of dollars injected into the market but the dollar movement between banks and companies. It is called unreal supply by some experts.

 

The rapid growth of foreign currency credits weigh on exchange rates when many credit contracts reach maturity at the same time. Even banks fear that when loans are mature and companies fail to collect USD from export sources, they will have to purchase at banks or free markets to repay the debts, fanning concerns over supply and demand unbalance. On the sidelines of a recent conference, Dr Le Xuan Nghia, Vice Chairman of the National Financial Oversight Committee, said the growth of foreign currency credits in the first six months of this year more than doubled the rate in the same period of 2010. Pressures on exchange rate will intensify when credit agreement reach maturity.

 

The difference in foreign currency deposits and loans amounted to VND85 trillion (exchanged) in the first six months of this year, compared with only VND41 trillion (exchanged) in the corresponding period of last year. Moreover, trade deficit is forecast to balloon in the third and fourth quarters because manufacturing companies will have to import more materials to produce goods for the New Year when a lot of foreign currency credit agreements fall due. A foreseeable rise in foreign currency demand will push up the USD/VND exchange rate toward the end of this year.

 

In fact, foreign currency deposits tend to decrease. The value of mobilised foreign currencies in May fell 6.03 percent from April while it dropped 5.88 percent in June over May. This is adversely impacting foreign currency liquidity at commercial banks and USD/VND exchange rate.

 

Some measures are been recommended to reduce outstanding foreign currency loans but one guarantees a perfect outcome. Banks can hardly lower interest rates in VND or lift the cap on USD deposit rates to narrow the differential because strong administrative interventions are unwise on the back of high inflation and macroeconomic uncertainties. If forex reserve requirement ratio is raised to increase borrowing costs for foreign currency loans, domestic companies will face more difficulties as a result while foreign companies can access cheaper credit sources. In addition, the banking system may face liquidity risk when forex reserve requirement is added.

 

In a letter sent to the SBV Governor, the Vietnam Banks Association proposed amending the Circular 07 to reduce the scope of forex borrowers. Accordingly, only companies with foreign currency incomes can borrow more from banks. The association also requested the central bank to seek out proper solutions to interest rates and exchange rates to narrow the rate gap between USD and VND loans. By doing so, banks will face less risks concerning the illiquidity of foreign currencies.