VietNamNet Bridge – In its report released on July 2, the Vietnam National Finance Supervision Council highlighted the sharp increase in outstanding loans in foreign currency, warning that there is pressure on foreign currency liquidity.

The dollar deposits had decreased by 5.5 percent by May 2014, while the dollar outstanding loans had increased by 7 percent.

The LDR, or the ratio of loans to deposits, soared from 84 percent late last year to 95.5 percent by May.

Deputy Director of the HCM City Branch of the State Bank of Vietnam Nguyen Hoang Minh has confirmed the upswing of the foreign currency loans.

In the first five months of 2014, the city’s total outstanding loans grew by 1.3 percent only, while foreign currency loans increased by 9 percent. Meanwhile, the foreign currency mobilized in the city fell by 7.37 percent.

The upward tendency has been explained by thriving exports, which leads to the higher demand for foreign currencies.

Meanwhile, several analysts have attributed the carry-trade deals made by businesses encouraged by the big gap between the dong and the dollar interest rates.

The president of a steel corporation in the Vinh Loc Industrial Zone in HCM City said it is more beneficial to borrow dollars now than dong.

With the average dollar lending interest rate of 5-6 percent per annum and the expected dong depreciation of 1-2 percent, businesses would bear the total capital mobilization cost of 6-8 percent in total.

The rate is much lower than the dong lending interest rates of between nine and 12 percent.

“We now borrow $500,000, or over VND10 billion from a bank at the interest rate of 5 percent per annum. As such, we have to pay $25,000, or VND535 million a year, in interest for the loan. The cost would be double if we borrow in dong,” he said.

Sacombank’s CEO Phan Huy Khang affirmed the dollar liquidity of the bank is strong, but admitted that the demand for dollar loans has been increasing rapidly.

Sacombank’s foreign currency outstanding loans, according to Khang, have increased by 5 percent so far this year, while the mobilized capital increased by 3 percent only.

Unlike some analysts who think the tendency of businesses borrowing in dollars instead of dong would harm the national economy, Minh of the State Bank believes that this would not put any considerable pressure on the dong/dollar exchange.

Minh said the dollar borrowers are mostly export companies, i.e., the ones which have income in foreign currencies to pay bank debts (they don’t have to use dong to buy dollars in the domestic market).

He believes the dollar outstanding loans will decline towards the end of the year, when the Circular No 29 takes effect. Under the circular, only a limited type of businesses can access foreign currency loans.

It is quite understandable why businesses borrow dollars and then sell dollars for dong to put into business: the dollar interest rate is now much more attractive than the dong interest rate, while the State Bank has promised to keep the dong/dollar exchange rate stable this year.

This is not the first time businesses are making carry-trade deals. They did this in 2008 as well.

K. Chi