With a large amount of foreign currency bought, foreign exchange reserves increases, the State Bank of Vietnam (SBV) continues to carry out the policy of gradually tightening credit in foreign currencies this year.
Pham Thanh Ha, director of the Monetary Policy DepartmentSBV said that SBV was buying a large amount of foreign currency, although the purchase was not as intensive as last year. SBV expects credit growth in 2019 to be similar to that of 2018 (14 percent). Foreign currency credit will continue to be cut in 2019 and interest rate of deposit in US dollar is still zero percent.
At the end of 2018, SBV issued Circular No. 42/2018/ TT-NHNN, amending and supplementing a number of articles of Circular No. 24/2015/ TT-NHNN to regulate foreign currency loans of credit institutions in which borrowers were residents. The circular aims to limit the dollarisation in the economy, step-by-step implementing the roadmap to gradually shift the relationship of mobilisation and lending to of buying and selling foreign currencies.
The Circular stipulates that credit institutions are allowed to provide short-term loans to make payments to foreign countries to import goods and services for production and trading to meet domestic demand, when borrowers have enough revenues in foreign currency to repay loans. This provision is implemented until the end of March 31, 2019.
According to Circular 42, credit institutions are allowed to provide medium and long-term loans to pay abroad for importing goods and services when borrowers have enough revenues in foreign currency from their production and business to repay their debts. This provision is carried out until the end of September 30, 2019.
In addition to the above provisions, when loans from foreign credit institutions and branches are disbursed, borrowers must sell such foreign currency loans to the lenders in forms of spot exchange transactions, except for cases when borrowers utilise the loans for payment of the transactions, which, according to law, must be paid in foreign currencies.
Thus, SBV continues to emphasize the long-term orientation of gradually shifting the relationship of loan and deposit in foreign currencies to the relationship of buying and selling foreign currencies, which reduces the ratio of credit in foreign currency on total credit, proceeding to dry up lending in foreign currencies by 2030 at the latest, basically overcoming the dollarisation.
According to SBV, in the period 2007-2011, due to high inflation, Vietnam’s dollarisation was at an alarming level. The amount of deposits in foreign currencies compared to the total payment means was above 20 percent. At the same time, the phenomenon of buying, selling, paying and hoarding foreign currencies in cash was quite common, the exchange rate difference between the formal and informal markets was high, creating great pressure on the official foreign exchange market and significantly affecting the exchange rate and currency management of SBV, the scale of State foreign exchange reserves declined sharply. This led to instability in exchange rate and foreign exchange market and partly caused the macroeconomic instability.
In response to this situation, SBV launched a comprehensive solution package to stabilise the foreign exchange market, control exchange rate expectations and raise the position of dong. One of them was to fix the interest rate ceiling of deposits in US dollar at zero percent.
Since the application of the above policy, the exchange rate and foreign exchange market has stabilised, the psychology of holding foreign currencies decreased (the dollarisation rate decreased from 11.06 percent in 2014 to 8.21 percent as of December 31, 2017). Moreover, the system of credit institutions changed from net selling to net buying of foreign currencies from 2016, creating conditions for SBV to buy a large amount of foreign currencies to supplement the State foreign exchange reserve fund.
SBV Governor Le Minh Hung said that SBV had bought more than six billion US dollar in 2018 to increase foreign exchange reserves. Basically, the policy of interest rate of deposit in US dollar at zero percent per year did not adversely affect capital inflows such as Foreign Institutional Investor (FII), Foreign Direct Investment (FDI) and remittances. Capital inflows were stable and had positive growth over the years.
Banking expert Huynh Buu Son recommends that businesses attract cheap capital when borrowing in foreign currencies, but also need to be cautious when the US Federal Reserve (Fed) rate hike has not stopped this year and coming years.
The determination of continuing short-term lending in foreign currencies, at least until the end of March 2019, is to support manufacturing and trading enterprises, especially exporters. The long-term orientation of SBV is to continue to select borrowers for lending in foreign currencies, while still renewing their loans, and at the same time to carry out the policy of anti-dollarisation and reduce foreign currency holding.
