Door to Foreign Currency Credits

 

The State Bank of Vietnam (SBV) said in a monthly report on January banking operations that “Foreign currency liquidity of the entire banking system was improved; commercial banks positively sold foreign currencies to the SBV; trading exchange rates at commercial banks remarkably decreased in comparison with the ceiling rate. Sometimes, the selling exchange rate was VND 300 higher than the buying exchange rate at commercial banks.”

 

The weekly report on banking operations from February 4 to 10, 2012, also released by the SBV, reads “In the week, the forex market continued to change positively. The foreign exchange position was improved. The VND/USD trading exchange rate quoted by commercial banks was at 20,810-20,880.” Vietcombank quoted USD/VND exchange rate at 20,810 - 20,870. This was also the common rate at other banks. The rate was VND10 lower than the first week of February and VND40 lower than the bid price quoted at the SBV Exchange.

 

According to the SBV weekly report, in the first week of February, most transactions in US dollars were overnight term, reaching an amount equivalent to VND33,118 billion, accounting for 45 percent of the total amount of USD transactions. The average interbank interest rate for Vietnamese dong loans was down by 0.07 percentage points (2-month term) to 7.14 percentage points (12 months term) for one- week to three-month and 12-month terms. The rates for other terms increased over the previous week. The average interest rates in US dollars for one-week to one-month, three-month and over 12-month terms decreased, of which the rates for three-week and over 12-month terms remarkable decreased by 0.65 percent points and 0.6 percentage points, respectively. The rates for overnight, two-month and six-month terms, of which the rate for two-month term sharply increased by 1.05 percentage points. The rates for 12-month term remained unchanged at 3.52 percent. A decline in average short-term interbank rates plus dripping lending on the open market showed an improvement in liquidity of Vietnamese dong and foreign currencies at commercial banks, of course excluding some small banks still struggling with liquidity problems on lack of security assets for loans on the interbank market. Arguably, commercial banks are hoarding US dollars to sell to the final purchaser, the SBV, to earn the margin.

 

According to an expert, there are many reasons to explain for better foreign currency liquidity. Fundamentally, this comes from the SBV Governor’s message on determinations to stabilise the foreign exchange market which are expressed by regulatory documents on lending and exchange operations. Besides, the central bank did not change the trading band of 1 percent in the last four months of 2011, thus strengthening the public confidence in the local currency. Last but not least, overseas remittance peaked during this period.

 

Despite improved liquidity, credit growth was almost unchanged. According to the SBV, in the year to January 17, 2012, credits for the economy declined 0.78 percent from the end of 2011. Particularly, VND-denominated credit slid 0.21 percent and foreign currency-denominated credit tumbled 2.93 percent. However, credit growths Hanoi and Ho Chi Minh City - the two biggest economic centres in the country, were 6.3 percent and 1.96 percent over the previous month, respectively. Foreign currency credit growth was significant. In Ho Chi Minh City, outstanding loans in foreign currencies reached VND219.9 trillion in January 2012, accounting for 27.1 percent of total outstanding loans and rising 13.3 percent over the same period of 2011. Many banks said borrowers were largely exporters.

 

This information coincided with that revealed by furniture and seafood exporters. Many companies said they had submitted borrowing documents starting in late 2011 to have funds for settling contracts with traditional customers in 2012. Nonetheless, the current annual interest rate of 6 - 7 percent is no longer a “preference” because VND interest rate has fallen to 13.5 - 17 percent per annum. “The domestic currency appreciates, exporters are at a disadvantage when they take back US dollars from their goods and services sold and sold the greenback it to banks to settle their old loans. In the meantime, it is very difficult to negotiate for a price hike in the contract to offset the depreciation of dollars, even a minor margin of 1 percent from 2011,” said Hong Suong, Director of Dai Phat Trading - Service - Export Co., Ltd.

 

Importers even face a harder situation. According to the SBV’s instruction, commercial limit loans for importers to settle for imports in an effort to curb trade deficit to ease trade balance. For that reason, they have a narrow access to foreign currency loans. Mr Tran Trong, owner of a beauty product distributor in Ho Chi Minh City, said: His company is facing the loss of exclusive contracts from a German producer. Many other companies are in the same situation as his business.

 

Notably, importers operating in non-priority foreign currency lending list are facing it hard to open letter of credit (L/C) although their imports are necessary for production. Steelmakers are an example. A representative from a steel company, who does not want to be named, said: “After many rounds of negotiations, we managed to open L/C but the bank requested us to return a third value of the USD loan as a security deposit. The bank will pay interests for the taken-back money in three months. After that, it will give that money to us. Possibly, the bank will convert our money into Vietnamese dong to place at banks for interest rate margin. The local dong bears a monthly rate of 1.16 percent, compared with 0.58 percent on dollars.”

 

In general, despite narrow access to foreign currency credits, importers and exporters with capital-using and debt payment plans in 2012, the door to foreign currency credits remains widely open. The final matter is how these companies will use this capital in the context that export markets remain volatile and domestic consumption has not fully recovered.

 

Besides, according to experts, exchange rate risks are a factor needed to be taken into account when companies want to borrow. Economist Le Dang Doanh said in 2011, the Vietnamese dong depreciated 18.58 percent, gold price rose 24 percent but the VND/USD exchange rate went up 10.2 percent. This meant the Vietnamese dong appreciated 9 percent against the US dollars. Basing on CPI growth of 1 percent in January and 17.27 percent year on year, he anticipated that CPI might rise 12 percent in the wake of higher power, coal, petroleum and healthcare service prices and shrinking purchasing power. He also projected that the Vietnamese dong might appreciate 8 percent in 2012, not just 3 percent as the SBV Governor had put forth. Thus, the elasticity gap of exchange rate adjustments is quite large. In that case, the disadvantage falls on exporters while encouragement is given to importers. Pressures on exchange rate will intensify.