The State Bank of Vietnam has spoken up about a recent sharp rise in offshore savings of local banks, rejecting concerns that its monetary policy led to dollar funds moving overseas.
In a new statement published on the central bank's website, To Huy Vu, chief of the bank's forecasts and statistics department, said local banks deposited US$5.9 billion in offshore account in the third quarter last year.
Vu said that was a strong increase from previous months but described it as "very normal."
During that period, Vietnamese people and businesses increased their dollar savings in the wake of the Chinese yuan depreciation in August and speculations about the US Federal Reserve's rate hike, Vu said.
With dollar deposits rising and lending falling, local banks would naturally open overseas accounts, he said.
He said this all happened before the central bank moved to scrap interest rates on dollar deposits, so the zero interest policy should not be blamed for the rise in overseas savings, Vu said.
In fact, offshore savings dropped to $369 million in the last quarter, he said.
Other financial institutions and corporate depositors did not increase their savings, estimated at $2 billion in Q3, he added.
Normal or unusual?
The central bank's statement came after the Hanoi-based Vietnam Institute for Economic and Policy Research reported last week that Vietnamese offshore savings increased sharply to US$7.3 billion at the end of Q3 last year, mostly from local banks.
The institute blamed the "unusual" rise, which was a key factor that caused a deficit of $6.6 billion in the national balance of payment in the quarter, on the central bank's policy to curb dollar hoarding.
It said despite zero interest, Vietnamese people were still keeping dollar savings in anticipation of a stronger US currency. With zero interest, people moved to keep their dollar savings under no fixed terms, which, in turn, became a problem for banks and their dollar liquidity because they could not use such savings for loans.
As a short term solution, these banks chose to send money offshore to at least earn some interest, according to the institute.
It also warned that Vietnamese offshore savings will likely continue to rise, if the central bank does not take measures for increasing people's confidence in the dong.
Cao Sy Kiem, a former governor of the central bank, rejected Vu's argument that the sharp increase in offshore savings happened before interest rates cuts, thus the policy was not to blame.
Kiem said the market always reacts before a new policy comes into effect. In this case, local banks must have predicted the zero interest policy when the central bank started drafting new rules.
Another critic, economist Nguyen Tri Hieu warned that the central bank's recent rules on dollar lending may prompt banks to send even more dollar funds offshore.
Taking effect early this month, the rules prohibit local banks from providing foreign-currency loans to exporters who intend to convert the loans into local currency to pay for locally incurred expenditures. The rationale was that dollar debts were often cheaper than dong loans.
Hieu said the rules mean banks will see less dollar borrowers and need to find a way to deal with the funds they are sitting on.
Nguyen Ngoc Thuy, director of Ho Chi Minh City-based rattan and bamboo furniture exporter Ba Nhat, was not happy with the fact that her company and many other exporters are struggling with high borrowing costs while banks are earning money on offshore savings.
Vietnamese exporters cannot compete with foreign rivals, now that they have to borrow money in the local currency at 7 percent a year, twice the interest rate of dollar loans, Thuy said.
A deputy general director of a local bank said on condition of anonymity that the central bank has made several attempts to reduce Vietnamese economy's reliance on the dollar, but the end result is not pretty: dollar savings are going overseas while local businesses no longer have access to cheap loans.
Anti-dollarization is important, but at the moment the central bank should focus on supporting local businesses, instead, he said.
Economist Ngo Tri Long agreed, saying that the central bank clearly moved to curb dollar savings and lending in a hurry without seeing a whole picture.
With what has been going on, more than $10 billion which flows into Vietnam annually through remittances will likely flow out of the country as offshore savings, without benefiting local businesses and the economy, Long said.
"It is right to prevent dollarization, but the time must be right when we do it," he said.