Gold, USD Rate Waves Accelerate

It is a few days from the effective date of the Circular 13 issued by the State Bank of Vietnam (SBV). Not only heating up Vietnamese dong mobilisation races, commercial lenders have also increased speed for bullion and greenback races. At present, interest rates for US dollar deposits have soared to 5.5 percent per annum while gold rates have topped 2 percent.

 

Most banks have raised greenback deposit rates to more than 5 percent per annum. Compared with just two months ago, the rate has been added roughly 2 percentage points. Even large lenders have also joined the race. Vietnam Thuong Tin Commercial Joint Stock Bank (VietBank) has just applied 4.85 percent plus interest rate to six-month greenback deposits and 5.30 percent rate for 36-month deposits. But, this is not the highest level on the market interest rate scale. US dollar deposit rate at Vietnam - Russia Bank (VRB) has climbed to 5.5 percent per annum, applied to 36 month term, while greenback deposits with a maturity of 12 month upwards range from 5.2 percent to 5.4 percent per annum. This is currently the highest on the market. Other commercial joint stock banks like PG Bank, OceanBank and SeABank, interest rates of US dollar deposits with a maturity of 12 months or above are in the region of 5 percent to 5.45 percent per annum.

 

Many commercial banks have picked up dollar deposit rates to above 5 percent a year since early September and some have made several revisions within a month. ABBank, HDBank, PG Bank, Bao Viet Bank, SeABank, Southern Bank and OceanBank are commonly applying 5 percent - 5.45 percent interest rates to 12-36 month dollar deposits.

 

Not only making a continuous rise in dong and dollar deposit rates, banks have also hiked gold deposit rates. Last week, the precious metal repeatedly broke all-time high price records, causing the deposit rate to double from 1 percent to 2 percent per annum. Even, some banks are applying a single-term deposit, regardless of volume, targeting at gold keepers. Preferential rates are also applied to depositors with 50 taels or more.

 

Navibank has increased the bullion deposit rate to 2 percent per annum on 11 month term and 1.4 to 1.6 percent to 1-9 month terms. Early this week, Viet A Bank also lifted its gold deposit from 0.73 percent -0, 85 percent a year to 1.35 percent, compared with the previous peak of only 0.5 percent.

 

According to specialists, the wide-scaled climbing of dollar and gold interest rates reflect strong pressures on commercial banks ahead of imminent Circular 13, which will force banks to the capital adequacy ratio (CAR) to 9 percent. The mobilisation of local currency, VND, also trails expectations even though interest rates have shot up, plus attractive promotions. Banks have to mobilise gold and foreign currencies and then convert to the local dong for lending. This signals money liquidity strains. As a result, the target of bringing down interest rates is hardly achievable.

 

Gold has exceeded the VND30 million/tael benchmark while the lending rate of 3 - 3.5 percent per annum is deemed relatively low, many investors mortgage properties to seek funds for gold trading. The difference between the Vietnamese dong and the bullion is about 10 percent a year and if the metal price climbs less than 10 percent, investors will not face risks. Nonetheless, the real reason for the soaring gold interest rate is to meet new regulations in the Circular 13. Many lenders are reported to have outstanding loans/deposits ratio exceed 90 percent while the new regulation permits only 80 percent. They cannot ask borrowers to settle prematurely and they are, as a result, forced to mobilise capital to offset the lending in excess. Banks will not increase the interest rate for dong deposits because the current level approximates their committed threshold. Nevertheless, there are no binding for gold and foreign currency deposits.

 

The interest rates are being directed to go down as expected by the Government and the State Bank of Vietnam but the market reality is contrary. The exchange rate has recently been adjusted, leading to a growing appetite for the appreciated greenback. The dollarization in Vietnam is relatively strong and higher interest rates prompted people and businesses to keep the dollar, instead of the local dong.

 

Notably, when the dollar interest rate in Vietnam is higher than global rate, there will be a stronger flow of carry trade. Foreign currencies are channelled into Vietnam to acquire shares and bonds or lend. The US dollar will be exchanged to the dong currency, whose interest is now very high. Exchange rate and interest rate of the domestic currency are the main drivers for carry trade funds to involve into a market. In case, the interest rate of the dong drops and the dollar appreciates against the dong, their profit will reduce and they will withdraw capital from the market.

 

When the dong interest rate was at a high level, people and businesses sold gold and dollars for the dong to deposit at banks for higher interest margins. Now, deposit rates of gold and dollars are high, they will act in the opposite way. Many people will buy dollars and gold to deposit and this is also a shelter against exchange risks. This scenario concerns economic management bodies. Gold waves and exchange rate pressure may cause significant instability on the market.