In order to concretise the government’s policy on limiting the “dollarisation” in the economy, from the end of this month, the State Bank of Vietnam (SBV) will definitely switch the foreign currency depositing borrowing relationship to foreign currency buying selling.
Before the deadline, by the end of August 2019, the US dollar/dong was almost unchanged compared to the beginning of the year. In the Asean, dong is the only currency that has been stable in the context of the Chinese yuan’s continuous decline. This is a rare phenomenon for the dong, due the trade relationship which is in the direction of huge deficit with China.
As noted by Viet Dragon Securities Company (VDSC), the US dollar liquidity in the banking system has not shown signs of tension, while the US dollar and dong overnight interest rate difference was at a safe level.
Specifically, the US dollar-dong interest rate difference was positive and tended to widen at the end of the month, fluctuating in a range of one to 5.5 percent per annum for short terms (from overnight to one-week).
The US dollar/dong interbank exchange rate increased by about 70-80 points in the first three sessions of August, before the liquidity on the monetary market became more stressful at the end of the month and expanded the interest rate difference, contributing to make the exchange rate to fall by 10-20 points below the threshold the buying price (23,200 dong per US dollar) of the SBV in the last week of August.
In the same month, it was estimated that the SBV purchased more than one billion US dollars of foreign currencies from commercial banks.
From a market perspective, VDSC said that the correlation factor of the currencies in the region is currently decreasing sharply due to the differentiation of macroeconomic foundation between countries.
In the domestic, VDSC emphasized two factors, including (1) the rising production capacity helps reduce the pressure of mobilising foreign currencies to import consumer goods and (2) the source of foreign currencies used to import intermediate goods and produce products for export.
Therefore VDSC stated that the supply and demand of foreign currencies, at this aspect, is also quite balanced.
Reducing dollarisation is an inevitable trend.
Regarding foreign exchange, the SBV is very aggressively addressing the dollarisation situation by switching the depositing borrowing relationship to foreign currency buying selling.
Specifically, Circular 42/2018/TT-NHNN amending and supplementing some articles of Circular 24/2015/TT-NHNN to concretise the government’s policy on limiting dollarisation in the economy, step by step implementing the roadmap to gradually switch the depositing borrowing relationship to foreign currency buying selling.
From September 31st 2019, credit institutions and foreign bank branches will stop lending medium and long-term foreign currency loans to make overseas payments for importing goods and services to serve the domestic demand even if borrowers have enough foreign currency revenue from production and business activities.
The short-term foreign currency loans with similar needs and conditions have also ended since March 31st 2019.
From a policy management perspective, when the economy is more integrated with the world, the anti-dollarisation must be accelerated to minimise the spillover effects from external fluctuations.
Tran Thi Nguyet Oanh, Head of Corporate Banking for the Southern Region, HSBC Vietnam assessed that these changes would limit foreign currency borrowings of importers (with or without foreign currency revenue) to serve domestic demand.
Although the dong borrowing rate is currently about two to three percent per annum higher than US dollar borrowing rate, the cost of borrowing in dong will increase, but not much, when businesses can sell foreign currency forwards to get dong and the dong is expected to fluctuate by about one to two percent a year.
“According to out observations from the beginning of 2019, when Circular 42/2018 officially came into effect, after nine months of implementation and application, this new regulation does not much affect businesses. Customers’ borrowing activities remain stable. This is thanks to a clear application roadmap, which gives businesses time to adjust their plans,” said Oanh.
A senior leader of Vietnam International Commercial Joint Stock Bank (VIB) said that from the beginning of the year, VIB discussed with customers about the compliance of the SBV’s policy against dollarisation and the gradual reduction of lending in US dollar.
VIB has advised and provided customers loans in dong, and prepared US dollar source for spot or forward sales to meet the demand of customers, avoiding exchange rate fluctuations.
Internally, VIB has also limited lending in US dollars to reduce dollarisation in the economy.
According to Oanh, HSBC has advised businesses on possible changes when Circular 42/2018 is fully applied, while providing the most reasonable and effective financial tools for customers, such as derivatives, helping customers forecast and respond to market changes.
“Reducing dollarisation, curbing speculation and hoarding of foreign currencies is an indispensable trend to help the financial market operate effectively and most importantly ensure monetary policy for the Vietnamese economy,” Hoa stressed.
