Vietnam News Network

Commercial banks have reported that the demand for foreign currency loans keeps increasing because of the depreciation of the dong against the dollar.

According to the HCM City Branch of the State Bank of Vietnam, the total outstanding loans of the banks in the city have increased by 16 percent over the end of 2009. The outstanding loans in dong have increased by 9.4 percent, while the outstanding loans in foreign currencies in the last three quarters have increased sharply by 36.4 percent.

A senior executive of Vietcombank said the demand for loans in dollar remains very high, therefore, banks have to raise deposit interest rates to attract more capital. Especially, some banks even offer the deposit interest rates at more than 5.2 percent per annum applied for long term deposits. Meanwhile, banks are lending at 6-7 percent per annum for 3-6 month term loans.

One of the biggest problems banks are facing is that they cannot mobilize much medium and long term capital. Therefore, some of banks use short term capital for long term loans. Analysts have warned that this will cause high risks to the banking system.

According to Dr Tran Du Lich, Member of the National Assembly’s Economics Committee, the dong lending interest rates are much higher than dollar interest rates. Therefore, businesses prefer borrowing in dollar to dong. In principle, export companies have enough dollars to pay bank debts. However, in reality, since Vietnam’s key export markets (the EU, US and Japan) have not recovered fully, and foreign partners usually make payment late. Therefore, companies have to seek to purchase dollars in the domestic market, or borrow dollars from banks, to pay bank debts (if they cannot pay debts on schedule, they will be imposed the overdue interest rate of eight percent per annum). As the result, the demand for dollar and the demand for dollar loans have both increased sharply.

In an effort to control the outstanding loans in foreign currencies, the State Bank of Vietnam has requested commercial banks to send monthly reports on the loans in foreign currencies.

In related news, Credit Agricole CIB, the biggest French bank, has released a report, predicting that the Vietnam dong would be devaluated further in the next year. Bloomberg newswire has quoted Dariusz Kowalczyk, an analyst of Credit Agricole in Hong Kong as saying that the latest two percent devaluation of the dong on August 18 is not big enough to balance the market

The report says the Vietnam dong will depreciate two more times in 2011 and by that time, the official exchange rate would be 20,500 dong per dollar.

According to Kowalczyk, the value of the Vietnam dong has been influenced by the trade deficit and prolonged credit which has put hard pressure on Vietnam’s payment balance.

Prior to that, the General Statistics Office announced on September 24 that in September the consumer price index (CPI) increased sharply by 1.31 percent over August. This means that Vietnam will have to exert more effort to curb the inflation rate in the last months of the year.