Dong weakens on news of new forex regulation

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The dong has edged down since early last week after the central bank said it will require commercial banks to cut their dollar holdings from early May, prompting a scramble for the greenback.

The State Bank of Vietnam set the exchange rate for the US dollar at VND20,828 Wednesday, unchanged since late December. Meanwhile, prices of the US dollar offered by commercial banks have increased since early last week.

The Bank for Foreign Trade of Vietnam, known as Vietcombank, bought the US dollar for VND20,800 a dollar, and its asking price was VND20,860 a dollar on Wednesday, up from VND20,770 and VND20,850 respectively a month ago.

General Director of Eximbank, Truong Van Phuoc attributed the higher dollar price to increasing demand for the foreign currency after new requirements on the foreign exchange rate.

The State Bank of Vietnam requires lenders, from May 2, to keep their long foreign exchange position at no more than 20 percent of their equity by the end of each day, compared with 30 percent now.

Branches of foreign banks with equity below $25 million will be required to keep their foreign exchange positions at no more than $5 million on a daily basis, the central bank said.

Experts said some banks, seeing the new regulation as a move aiming to prevent dollar hoarding in the country, have strengthened buying dollars over the past week.

Cao Sy Kiem, former governor of the State Bank of Vietnam, said the new rule means a bank with equity of VND3 trillion will be allowed to hold $30 million worth of US dollars at the end of the day, compared to $45 million at present.

Kiem said previously not all banks used up the 30 percent limit, with some even having a foreign exchange position of under 20 percent after converting their dollar holdings into the dong and earning high interest from deposits in other banks.

Now that there is a new regulation which will give the banks much less room to hold the dollars, they are rushing to strengthen their forex holdings again for fear it might be difficult to do so later.

The interest rate on dong deposits is capped at 13 percent each year, while that on the dollar is only 2 percent.

The dollar hike is also attributed to the large demand among firms due to the big gap between lending interest rates of dollar and the dong, according to the CEO of a Hanoi-based commercial bank who wanted to remain anonymous.

Now, banks are offering dollar lending interest rates of some 5-7 percent each year, while the dong rate is some 18-20 percent, he said.

Kiem said the dollar price hike is a short-term phenomenon, as firms, in the later part of the first quarter will need the greenbacks to pay debts or import materials that will be used for production in the next quarter.

The exchange rate will go down in a short while with firms not expected to have much demand for dollars, he said, explaining that a lower trade deficit is anticipated this year.

Experts have said businesses will reduce imports due to unfavorable economic conditions. Furthermore, the central bank has stepped up measures to control the gold market, which ultimately reduces demand for dollars.

Meanwhile, another regulation from the central bank that will also come into effect in May will restrict lending in foreign currencies, helping reduce dollar demand further.

Under the regulation, commercial banks are only allowed to offer loans in US dollars to borrowers who can prove that they have an adequate source of revenue in foreign currency from their business operations to clear the loans.

Businesses failing to meet the requirement can only access bank loans if they have specific approval from the central bank, the rule stipulates.

The central bank aims to have the dong depreciate by no more than 2-3 percent against the dollar this year. The local currency fell 5.2 percent in 2011.

Warren Hogan, chief economist of bank ANZ, reckons that the dong may weaken to VND21,800 per dollar by the end of this year.

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