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Foreign currency market thought to be latent with risks   2010-09-29 - Nguoi lao dong

Financial experts have warned that the foreign currency market would see intricate changes in the last months of the year, since demand for foreign currency loans has been rising rapidly, while demand for dollars is expected to climb sharply towards the year’s end.


One month after the State Bank of Vietnam (SBV) announced the new interbank exchange rate (the rate increased from 18,544 dong per dollar to 18,932 dong per dollar), commercial banks have unanimously raised deposit dollar interest rates by 0.2-0.5 percent per annum to five percent. The sharp rise is explained by increasing demand for foreign currency loans. 


Bankers reported that, in late August 2010, the dong/dollar exchange rate increased by 400 dong per dollar, which meant the dollar appreciated and thus dollar interest rates needed to increase accordingly. Besides, demand for loans in dollars typically climbs at the end of the year when firms rush to import products for Tet.


In principle, increasing calls for dollars can be satisfied by a rising supply of dollars, when more kieu hoi (overseas remittances) that Vietnamese send to their relatives in Vietnam, arrive, and the country earns more dollars from services and tourism. However, people now strongly believe that the dollar price will continue increasing, so they do not want to sell them. As a consequence, banks find it hard to mobilize dollars and must offer higher interest rates for dollar deposits.


With current deposit interest rates of five percent, a banker in HCM City noted that he needs to lend at 6.5-8 percent per annum (or one percent higher than the previous interest rate) to make a profit.


Meanwhile, lending interest rate increases would not be good news at all, because this will make production cost higher, thus pushing up the consumer price index (CPI) up and making the task of curbing inflation improbable.


The General Statistics Office (GSO) announced that CPI in September 2010 increased sharply by 1.31 percent over the previous month. The sharp 2.1 percent dong/dollar exchange rate adjustment has been blamed for the increase. The more expensive dollar has also forced companies to pay higher for imported input materials and also forced production costs up. Dairy producers, who import 80 percent of materials, raised price by five percent over August 2010.


Financial analysts agree that there have been signs of a short dollar supply. Export revenue in September 2010 decreased by 10 percent over the previous month, while the trade deficit in September reached $8.58 billion, equal to the trade deficit in the first 11 months of 2009. The demand for dollar loans tends to increase, leading to a hike in lending interest rates. Meanwhile, banks are trying to collect debts from matured credit contracts, pressuring enterprises to collect and store dollars.


Dr. Tran Huy Hoang, Banking Faculty Dean of the HCM City Economics University, remarked that it was the right move for SBV to adjust the dong/dollar exchange rate, since the new rate truly reflects the current situation. However, if prices on goods and trade deficit controls remain ineffective, the exchange rate adjustment will lead to higher inflation.


A senior banking executive observed that, if Vietnam’s trade deficit cannot be improved, it is very likely that the exchange rate will be adjusted further. Therefore, firms with earnings in dollars should also borrow in dollars.


To minimize risks, financial experts have advised companies to take out exchange rate insurance policies. However, bankers complain that this is nearly impossible because the legal framework remains unclear.

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