VIETNAM SBV urged to loosen the “valve of foreign currency credit”

SBV urged to loosen the “valve of foreign currency credit”

VietFinanceNews.com - The stable dong/dollar exchange rate has prompted businesses to borrow in dollar instead of dong in order to enjoy low interest rates. Banks have also confirmed that the credit growth has been seen mostly in dollar lending.

The State Bank of Vietnam on May 2, 2012 released the Circular 03 in an effort to restrict the lending in foreign currencies to encourage enterprises to buy domestic goods. The bank has recently extended the validity of the circular until the end of December 2012.

However, experts believe that it’s the right time to amend the circular to make its provisions suitable to the business specific characteristics of export companies.

Dollar loans still favored

The stable dong/dollar exchange rate has lifted the worry of the businesses that borrow capital in dollars. This has also prompted other businesses to borrow dollars to enjoy low interest rates.

Though the dong lending interest rate has been lowered to 15 percent, dong capital remains very costly. As dollar loans can be obtained at the interest rates of 6-7 percent per annum only, it’s understandable why businesses still prefer dollar loans to dong.

The decision by the State Bank to extend the validity of the circular has been applauded by commercial banks. Tran Xuan Quang, Deputy General Director of Maritime Bank said this would help businesses much, allowing them to reduce the capital costs when they can borrow capital at low interest rates in the context of stabilized exchange rate.

As such, export enterprises can borrow foreign currencies to import goods, or use dong to buy foreign currencies from the State Bank to import goods, i.e. they have more choices for financial solutions to better their business performance.

The exchange rate tendency

At present, the foreign currency reserves are profuse, while the banks’ liquidity is very good. However, if the exchange rate would fluctuate in the future remains a question.

Dr Le Xuan Nghia, a well known economist, said while the dollar price in the world tends to appreciate thanks to the recovery of the US economy, the dollar price in Vietnam tends to decrease because of the sharp falls of the imports in the context of the production stagnation. Therefore, the current account balance deficit is low.

Meanwhile, the capital balance does not change significantly. Therefore, experts have every reason to believe that the international payment balance may see the surplus of several billions of dollars. As such, one can expect no big changes in the exchange rate in 2012.

However, Dr Le Dat Chi from the HCM City Economics University said the exchange rate would also depend on the gold market management of the State Bank and the demand stimulus policies.

If the domestic gold price is much higher than the international price, this would put a pressure on the exchange rate. This explains why the dong/dollar exchange rate remains an unknown in the reports of foreign financial institutions.

Though agreeing that the restriction on dollar lending would help ease the dollarization, a serious and chronic disease of the national economy, they have pointed out that the Circular No. 03 would put difficulties for enterprises.

In Vietnam, there are a lot of purely import or purely export enterprises. Meanwhile, the circular said export enterprises cannot borrow dollars if they do not need dollars to make payment for imports, but mostly buy materials from domestic sources. Only the enterprises which import materials to make products for exports, can borrow dollars at low costs.

This would lead to the decreases of export enterprises’ profits, thus annulling the business driving force of export enterprises.

http://www.vietfinancenews.com/2012/05/sbv-urged-to-loosen-valve-of-foreign.html