Dong devaluation puts Vietnam importers in a bind

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The recent devaluation of the Vietnamese dong has made things more difficult for importers, led to higher input costs and put consumers at risk of bearing increased product prices, experts say.

The State Bank of Vietnam (SBV) on February 11 lowered by 3.4 percent the official value of the dong, which is pegged to the US dollar, bringing the currency more in line with how it trades on the street in venues not sanctioned by the government.

The average interbank rate on Thursday was VND19,090 per dollar, compared with VND18,991 the previous day.

Nguyen Duc Tien, director of the Tay Nguyen Investment Company, which imports machinery and equipment for coffee production, said his firm has borrowed about US$50 million from the banks, so they would have to pay additional interest amounting to dozens of billions of dong.

"Higher prices of dollar and some other commodities have created difficulty after difficulty for companies like ours," he said.

Hoang Quang Nam, director of battery producer Tia Sang, was also worried: "We have to use foreign currency to import materials for production, so the dong devaluation greatly affects our business and production." Lead accounts for up to 60 percent of his company's production costs, and the entire quantity needed is imported.

Le Ba Lich, chairman of the Vietnam Animal Feed Association, said nearly 40 percent of the domestic demand for animal feed was imported. Thus, the lower value of the dong is "a big blow" to the association's members.

However, the higher dollar price was not the sole difficulty for these firms, as some of them were not able to buy dollars from commercial banks at exchange rates regulated by the SBV. "Some commercial banks have refused to lend us dollars citing a foreign currency shortage," he said.

Higher prices of the dollar and some essential commodities such as electricity, water, and gasoline may boost the price of animal feed by 10-15 percent, Lich said.

Farmers and livestock farms will suffer the most from higher input costs, as animal feed producers and trade firms will increase their selling prices, Lich said. Meanwhile, the prices of domestic meat are more or less on par with imports, so the higher animal feed prices will push up their cost, creating more chances for imported products and inflicting losses on domestic farmers.

Firms should practice thrift in production, and use several different foreign currencies in payment to avoid a heavy reliance on dollars, Lich said. For its part, the government should issue policies that help firms buy foreign currencies at the price set by the central bank, he added.

Costly credit

The SBV late last month issued a new regulation that allows lenders to negotiate with clients interest rates for medium- and long-term loans.

Earlier, Vietnamese law prohibited such a move. Banks could only decide lending rates for consumer loans depending on the level of risk. For other loans, interest rates were not allowed to exceed 150 percent of the key rate regulated by the central bank.

Duong Thu Huong, general secretary of the Vietnam Bank Association, said, "This (the regulation on negotiation-based interest rates) is the measure that will help the currency market operate under the rule of capital supply and demand."

"The average level of interest rates, in the next few days, will be higher, or at least equal to the current one. Thus, inefficient firms will have to consider more carefully when borrowing capital from banks," she said. "The regulation will help control inflation, and avoid credit growth from heating up."

However, the new decision has not come as good news to many businesses. Do Duy Phi, chairman of the Vietnam Fertilizer Association, said: "Firms, especially small-and-medium sized ones, were already finding it difficult to access bank loans. Now, it gets worse for them."

Since the central bank has allowed negotiable rates, some lenders have set their rates 4-8 percentage points higher than the previous rate cap of 12 percent. Sacombank, for instance, is now offering lending rates of around 16 percent a year while Eximbank has lifted their rates to 16.8 percent a year.

A credit manager at a bank told Thanh Nien many lenders have not decided on their new rates yet as they are waiting for their rivals to make the first move.

Analysts said if lending rates are raised too high, some businesses will have to stop taking loans from banks.

According to the chairman of a bank in Ho Chi Minh City which now offers loans at rates of 17-18 percent, several companies have said they would choose to raise funds by issuing bonds and stocks instead.

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