Capping Foreign Currency Deposit Rate at 1 Pct/Yr

According to VAFI, abnormally strong gains of gold and US dollar on the free market are mainly caused by sentimental factors, rather than rational exchange rates policies or domestic economic turmoil.

 

VAFI said Vietnam’s economy has gotten through the crisis period caused by the global financial meltdown, although a small number of enterprises are still distressed by the consequences. Currently, internal factors of Vietnam’s economy are considered relatively strong, supported by agricultural production and the private, foreign and public-private economic sectors. Fundamental macroeconomic indicators are very good, with soaring export growth, rising state budget turnover, expanding GDP and increasing employment.

 

In particular, according to research by the World Bank (WB) and the Asian Development Bank (ADB), the balance of payments has not been passive. VAFI pointed out that if people did not psychologically speculate on dollars, the balance of payments would be insured.

 

Currently, the vast majority of domestic enterprises are subject to high borrowing rates. However, according to Mr Nguyen Hoang Hai, General Secretary of VAFI, the rate is higher than average but it is still acceptable in the context of Vietnam, given the huge demand for development investment capital.

 

Besides, deposit rates of foreign currencies are too high, around 5 percent per annum, depending on banks. This deposit rate is too high compared with the world average.

 

Mr Hai asserted that the high rate of foreign currency deposits will prompt individuals and companies to speculate on the greenback, intensifying strains on the dollar supply for the manufacturing sector.

The State Bank has imposed a ceiling rate of 1 percent per annum for foreign currency deposits. This policy is correct, but not enough to dispel sentimental investment and dollar hoarding.

Some foreign investors suggested applying a zero-percent interest rate on deposits in foreign currencies, or imposing a progressive tax on foreign currency deposits, in order to widen the gap between the Vietnam dong and dollar interest rates. Once people understand that they cannot profit from dollar deposits, they will make deposits in Vietnamese dong. This will help ease the demand for foreign currencies and channel them into business sectors.

 

According to VAFI, the volume of foreign currencies deposited by people at commercial banks is very high, accounting for 50-60 percent of the total deposit in foreign currencies. So, if the proposal is approved, Vietnamese people will compare the dollar interest rate and the inflation rate, and they will find it more profitable to make deposits in Vietnamese dong. People will not want to purchase dollars any more, while those who have dollars will sell them for Vietnam dong which they will deposit at banks to get profit. If so, the USD/VND exchange rate will go down.

Applying a ceiling rate will help strengthen the Vietnamese dong, thus easing dong deposit interest rates and curbing inflation.

 

So, what is the bad side of the rate cap on foreign currency deposits? Some monetary policy experts said that if the central bank introduced policies to squeeze foreign currency deposits, people will withdraw foreign currencies from commercial banks to invest in other areas.

 

VAFI has conducted a survey and found that people will not purchase gold because the prices are now quite high. As the global economy recovers, the gold price is expected to decrease in the near future and the bullion option is risky in the longer term. Some people may pour money into the real estate sector, but VAFI believes these will be a minority. Besides, real estate investment at present is a better option than dollar hoarding because this market is freezing. Moreover, using US dollars to invest in real estate also means pumping the cash into business activities.

 

Stock investments are also a good option for experienced investors, as the equity market is now a very attractive value investment.

 

Last but not least, people can still deposit foreign currencies at banks for low rates, and this is a chance for banks to bring down deposit rates for different currencies.

In recent years, several experts have supported a weak dong policy to increase the competitiveness of domestic enterprises and boost exports. In fact, this approach is incorrect because a weak local currency will raise national debt and corporate debt (loans in foreign currencies), strengthen interest rates and dollar speculation, intensify inflationary pressures and bring up deposit rates.

 

"Vietnam is in the process of international integration and is vulnerable to trade deficits and inflation, thus, it is very difficult to maintain a fixed exchange rate over a long period but it can maintain a relatively fixed exchange rate in specific periods. Foreign investors (direct or indirect), domestic investors and stock investors expect a stable exchange rate policy in specific periods, even though interest rates on VND deposits are higher than in periods with weak dong, unstable exchange rates and unpredictable inflation,” Hai said.

 

According to Mr Hai, short-term solutions for exchange rate stabilisation are to control deposits in foreign currencies and fight against dollarization. If these solutions do not work, the base rate should be hiked for a short period of time. The base rate increase will help reduce imports and ease inflationary pressures. In 2011, Vietnam should reduce its budget deficit and credit growth, although it will have to accept lower GDP growth rates to give Vietnamese companies more time to strengthen corporate governance and intensive investment.

 

Long-term solutions to exchange rate stabilisation policies are to hike power prices to attract more domestic and foreign finances into this sector, bolster exports, accelerate the production of new resources, alternate imports with domestically made products and develop the stock market.