New central bank directives to reduce dollar hoarding, economist says

A new cap on dollar deposit rates – 3 percent for individuals and 1 percent for institutions – took effect on April 13. In addition to the rate cap, local lenders will be forced to increase the ratio of their dollars in reserve by 2 percentage points to a range from 3 percent to 6 percent starting May.

The measures are aimed at stabilizing Vietnam’s volatile foreign exchange market. Tran Hoang Ngan of the National Advisory Council for Financial and Monetary Policies spoke with Thanh Nien Weekly about the long-term implications of the new policy.

Thanh Nien Weekly: What impact will the dollar interest rate cap and reserve ratio increase have on the market?

Tran Hoang Ngan: The interest rate cap will help reduce dollarization of the local market. By capping interest rates, the government will make dollar deposits less appealing to Vietnamese people. Given the high interest rates on dong deposits (some 14 percent per year), the government expects that the policy change will make the domestic currency a more appealing means of savings.

The State Bank of Vietnam has also tightened foreign currency credit, so borrowing foreign currency will not be as easy as before. The hope is that a new set of strict requirements will reduce outstanding foreign currency loans at commercial banks. Reining in the loans will also reduce dollarization.

Will the lowered interest rates on dollar deposits cut into overseas remittances?

There will certainly be a reduction in overseas money coming in, but the size of that dip will depend on what’s going on abroad. Right now, interest rates on dollar deposits in the world are low – roughly 0.6 percent in Singapore, and 0.4-0.8 percent in the US. Meanwhile, interest rates on dollar deposits in Vietnam remain high, compared to the rest of the world. Thus, our overseas remittances should not be strongly affected.

Many Vietnamese looked to the dollar to protect their capital amid rising inflation. But things have evened out – the government effectively stabilized the exchange rate by issuing Resolution 11 on February 24.

The dollar, which was then being traded at VND22,500, has since fallen below VND21,000. The gap in the interest rates on dong and dollar deposits is now large enough to offset the dong devaluation. I think people will soon start saving their money in dong.

Won’t this affect dollar loans at commercial banks?

We’ll need to pay close attention to this. Right now, the interest rates on dollar loans offered by commercial banks are high. As we apply dollar interest rate caps and dollar reserve ratio increase, the State Bank of Vietnam should continue to push banks to increase their foreign currency reserves. The reserve ratio increase, along with strict loan requirements, will help raise interest rates on dollar loans, thus reducing the number of outstanding loans.

 How high should the reserve ratio be?

The ratio should be set based on lending interest rates.

The government needs to keep a close eye on the market. If outstanding dollar loans do not rise, the ratio is sufficient, and we needn’t bother increasing it. If the outstanding dollar loans continue to rise, the state should raise the dollar reserve ratio.

GOING ON A DOLLAR DIET

Duong Thu Huong, general secretary of the Vietnam Banks Association, said that Vietnamese investors, amid falling dollar deposit interest rates, will likely reconsider their dollar deposits.

Huong believes that Vietnamese citizens will begin to rely on the dong as a source of savings. The switch, he says, will benefit depositors and the economy at large.

Vietnam should not worry about a drop in overseas remittances because Vietnamese citizens, working abroad to support their families, will continue to send money home.

In the past, she said, foreign investors have deposited foreign currency in Vietnamese banks under the guise of “remittances” in order to capitalize on the country’s high interest rates.

Some US$8 billion considered “overseas remittances” is not, in fact, money sent home by relatives working abroad, Huong said.

From May, only importers or exporters, who are permitted to accept payments in foreign currency, will be permitted to take out dollar loans in Vietnam.

An interest race war only occurs when foreign currency can easily be obtained at local banks, Huong said, adding that she was confident the latest moves by the central bank would lead to greater confidence in the dong.