Commercial banks have raised dollar deposit interest rates to meet companies' increasing demand for the greenback, but as the trade deficit widens, pressure on supply may push up the exchange rate.
Although the State Bank of Vietnam affirmed the abundant supply of the foreign currency, analysts worry that even the new interest rates of over 5 percent won't hold in enough dollars.
The LienVietBank increased the dollar deposit interest rates with terms of 24 months and upwards to 5.25 percent per annum starting on July 24, while at the same time upping rates on one-year dollar-denominated bonds to 5.15 percent.
An Binh Bank raised the annual rates with terms of 12, 24 and 48 months to 5.2 percent, 5.4 percent and 5.5 percent, respectively, on June 18.
Interest rates on dollar deposits have been stable recently, standing at 4-4.5 percent per year from the beginning of this year to early this month.
Independent financial analyst Nguyen Manh said the interest rates would not decline and were likely to rise due to the higher demand for dollar loans.
Loans rose 1.86 percent in May alone, during which dollar loans rose 3.16 percent, according to the central bank. Dollar loans expanded 20.23 percent in the first five months.
Because the exchange rate between the dollar and dong has been stable, and dollar interest rates have been low compared to dong loans, many companies have taken out foreign currency loans to do business, Manh said.
Lending interest rates on the dollar were 6-8 percent per year early this year, while those on the dong were as high as 14 percent.
Manh said that although the foreign currency loans were not very large, the country should carefully consider the negative affects of increasing dollar loans as the economy is already highly dollarized.
He said many firms do not have dollar revenue sources to repay their foreign currency loans. "Thus, firms may face risks due to the higher exchange rate between dollar and dong."
Banks have agreed to cut interest rates from July to support the government's target of 6.5 percent economic growth this year, but bankers said they do not expect a significant drop.
Top lenders have pledged to cut lending rates to 12-12.5 percent next month from around 13 percent at the moment, the State Bank of Vietnam said on its website. After a meeting with the central bank governor, they agreed to bring their deposit rates down to 11 percent next month from 11.5 percent, and to 10.2-10.5 percent by September.
"The central bank will have to strongly support lenders via its open market operations. Otherwise, they won't be able to cut deposit and lending rates," a trader with a Hanoi-based bank said.
"I don't think there will be a significant change in the rate level. Instead, banks will cut rates in small steps and keep an eye on how the central bank supports the process," the trader said. (Reuters)
Bankers said demand for dollars would rise in September or October when short term loans, which have grown strongly this year and are often given out for six to nine months, are due for repayment.
If exports do not pick up, there may be pressure on the foreign exchange market when importers need to buy dollars for repayment.
The bigger trade deficit may also put pressure on the foreign currency supply, pushing up the dong/dollar exchange rate.
The trade deficit widened to $6.73 billion in the first half from $2.26 billion in the same period a year earlier, according to preliminary figures from the General Statistics Office in Hanoi.
Economist Chu Viet Anh from the State Bank of Vietnam said the dong/dollar exchange rate was often tense at the end of the second quarter. When combined with a widening trade deficit and increasing inflation, dollar loan repayment will create more pressure on the currency supply this year, he said in a report published by news website VietnamNet last week.
The Vietnamese dong was traded at 19,068 per dollar on July 1, compared with 18,479 at the end of 2009.
The central bank has recently asked commercial banks to restrict dollar loans, requiring them to report on the amount of foreign money they sell and lend to importers on a weekly basis.
Banks also need to ensure their outstanding foreign exchange loans are less than their foreign currency deposits raised from companies and residents, and must tightly control the credit line and terms of each loan, the central bank said in a statement.
Stable forex market
State Bank of Vietnam Governor Nguyen Van Giau has no worries. "The forex market is going smoothly and supply and demand are well-balanced," he said.
Nguyen Quang Huy, head of the central bank's foreign exchange management department, said Vietnam's current exchange rate had not been seriously affected by the trade deficit as some key dollar sources, like overseas remittances, foreign investment and income from the tourism industry, had grown in the first half of the year.
Overseas remittances are expected to be $3.6 billion in the first six months.
The foreign exchange market has been stable since March, and commercial banks have abundant foreign currency reserves to sell to the central bank, he said.
Although foreign currency credit has increased sharply since 2009, it is still under control. Commercial banks now have abundant foreign currency reserves of about $600 million in idle capital on hand, he said.