Dollar loan surge may pressure exchange rate in Vietnam

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A rise in dollar loans in Vietnam could put pressure on the dollar/dong exchange rate later this year when corporate borrowers seek to repay their debt, bankers said on Monday.

But any market impact would likely be limited as the State Bank of Vietnam, or the central bank, is expected to step in to help cool dollar demand, seen coming from July as most dollar loans carry terms of three or six months, they said.

"Loans in foreign currency rose fast so far this year because companies consider the lending rates more attractive than those on the dong," an official with a Vietnamese bank in Hanoi said.

She said dollar loans, now offered at 6.5-7.0 percent versus 14-15 percent in dong lending rates, picked up strongly in March and April, partly because companies saw a stable exchange rate.

The dollar has so far this year gained only 2.7 percent against the dong, standing at VND18,990/19,040 on Monday, after rising 5.4 percent in 2009.

Dollar loans at the end of April rose 17.5 percent from the end of 2009 while dong loans only increased 2.3 percent in the same period, the central bank-run Vietnam Banking newspaper said in a weekend report.

In April alone, dollar loans rose 3 percent from March, exceeding the lending pace in the dong of 1.41 percent, the central bank said in a separate monthly report.

Bankers said the risk of fast dollar loan growth would emerge in the second half of the year.

"For companies which do not have dollar income, their dollar demand will put pressure on banks and on the exchange rate," another Vietnamese banker said.

Last Thursday the central bank pledged to keep the foreign exchange rate stable, looking to dispel market uncertainty following media reports suggesting the currency would be devalued by 4 percent.

The central bank also said banks had sold $1 billion since mid-April to the central bank thanks to their dollar surplus.

Dollar/dong rate softened to VND18,940/19,040 per dollar on the interbank market last Friday after the central bank's comment, from VND19,005/19,025 per dollar last Thursday.

Some expect the rising dollar loans to have little impact on the dong exchange rate.

Asia Commercial Bank Deputy Chief Executive Do Minh Toan was quoted by Monday's Tuoi Tre newspaper as saying the exchange rate would not fluctuate strongly as most of dollar borrowers are export firms which have dollar income and can repay easily.

As an additional supply of foreign exchange, the Japanese government signed an agreement last Friday on a soft loan worth $306 million to help Vietnam build a highway, improve water environment in Ho Chi Minh City and to cope with climate change.

On the macro level, Vietnam estimated its trade deficit in the first four months of 2010 widened to $4.65 billion from a gap of $215 million a year earlier.

But for the whole of 2010, the government forecast the trade deficit to narrow to $12.12 billion, from $12.25 billion in 2009.

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