US dollar becoming less favorable, dong on the rise

Published: 03/05/2011 05:00

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VietNamNet Bridge – The dollar index has decreased its lowest point since 2008 in comparison with other foreign hard currencies. This is now for the first time in Vietnam within the last 10 years. The dollar price has been decreasing day after day against the dong.

On April 28, the dollar purchase price quoted by commercial banks was at the same level of 20,486 dong per dollar, while the sale price was quoted at 20,560 dong per dollar.

The foreign currency has made a volte-face from two months ago. Even bankers could not imagine that the foreign currency supply and demand would change to sharply one day. Not only individuals, but export companies, who have earnings in dollars, have also been registering to sell dollars to banks.

A banker said that one month ago, it was exporters, who had the right to set up the dollar price. However, the situation has changed now: only commercial banks can set up the dollar prices at which they purchase dollars from businesses.

Dong on the rise

Thoi bao Kinh te Saigon has quoted its sources as saying that the State Bank of Vietnam is purchasing foreign currencies in order to increase the foreign currency reserves, but it does not purchase big volumes of dollars at the same time. The bank has been thoroughly considering the time and the price to purchase. It also has to make purchases in the way, so that the volume of dong put into circulation to purchase dollars must not be too big, or this will damage the efforts to curb inflation.

The newspaper believes that in order to successfully purchase dollars and not to let too much dong in circulation, the State Bank will prolong the time of purchasing dollars. As such, the US dollar is likely to depreciate against the dong or the dollar price will stay at low levels.

From now, experts believe the dollar purchase prices to be applied by commercial banks will completely depend on the official exchange rates  announced daily by the State Bank. Meanwhile, the sale prices will not be much higher than the purchase prices.

Sources said that the State Bank is considering raising the ceiling interest rates for dong deposits from 14 percent to 16 percent, in order to help banks attract more capital from the public.

If the decision is made, it would bring two things. Firstly, this will help banks improve their liquidity, while this will not change the actual interest rates. In fact, banks now have to pay the interest rates of 16-18 percent per annum already, even though the central bank has told banks not to pay more than 14 percent. Meanwhile, experts believe that banks will not be able to raise the lending interest rates further. Businesses now complain that the interest rates of 19-24 percent are overly high, and they will refuse loans if banks raise interest rates further.

Secondly, the move will help confirm the consistency in the monetary policies. Stabilizing the market and strengthening the dong are the two top priority tasks.

Dollar loans will decrease or increase?

A question has been raised that whether the current situation (the exchange rate proves to be beneficial to dollar borrowers, while the dong interest rates are very high) would lead to the increases of dollar loans.

In order to lend in foreign currencies, under the current regulations, banks will have to commit to sell foreign currencies to borrowers later when they need dollars to pay debts.

In this case, banks will see no benefits when they store dollars to sell dollars later to borrowers, because in order to keep dollars, they need to have proportional volumes of dong. If so, banks will have to “bury” dong and cannot make profits with the dong.

At this moment, the mobilized capital in the dollar has been decreasing since people have been shifting to deposit dong instead of dollars. At some banks, the outstanding loans in dollars are even higher than the mobilized capital in dollars. In this case, banks will not be foolish to further lend in dollars, which proves to be risky.

As such, the dollar outstanding loans would decrease, not increase.

Source: SGTT

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