Foreign currency credit: Balanced to avoid "dollarization"

Balance of foreign currency credit at a reasonable level to ensure the safety and sustainability of the banking system. Source: Internet.

Gain momentum

In terms of sectoral credit growth in the first months of 2018, the report said that the growth rate is reasonable, consistent with the macro balance and focus on the production sector, priority areas.

Mr. Pham Thanh Ha, Monetary Policy Department, State Bank of Vietnam (SBV) said that in the first four months, credit growth was reasonable, over 5%, with a relatively moderate growth rate for mobilizing capital to ensure the liquidity of the system and stabilize the interest rate; whereas formerly it was usually only 3-3.5%. New indicators for the past two years (2017 and 2018) show fairly consistent growth since the beginning of these years, contributing to stabilizing the economy a lot compared to previous years.

However, according to data from the National Financial Supervisory Commission, in the first quarter 2018, credit is estimated to have increased by 3.5% compared to the end of 2017 (the same period increased by 4.3% in 2017). VND credit increased 3.3%, accounting for 91.9% of total credit while foreign currency credit increased 5.4%, accounting for 8.1% of total credit (end of 2017 is 7.9%), therefore, foreign currency credit continued to increase significantly. The sharp rise of foreign currency credit has been warned in the last months of 2017. The SBV governor has asked credit institutions and foreign bank branches to implement well regulations on foreign capital mobilization: Strictly control the credit growth rate in foreign currencies and at the same time control the credit/capital mobilization ratio in foreign currencies to ensure the balance between capital mobilization and lending; Strengthen control of risks in credit activities in foreign currency; Not to apply technical measures to dodge or exceed the ceiling deposit interest rate; Prohibit unfair competition in raising capital.

The cause of credit growth in 2018, is partly because the SBV has once again agreed to extend short-term foreign currency loans until the end of 2018. In addition, from the domestic and international economy, such as demand for foreign currency to import goods at the beginning of the year, trade deficit has returned in May, up to 500 million USD after 4 consecutive months of trade surplus. If this situation continues, the demand for foreign currency will increase. In addition, in the early months of 2018, foreign exchange rates in the country and the world continuously fluctuate, although the fluctuation of the domestic exchange rate is still within the permissible range, but it also partly affects the situation of foreign currency supply of credit institutions.

Especially, from a survey of some enterprises specializing in import and export, it is known they want to borrow money in foreign currency more than in VND, not only for the advantage in dealing with foreign partners with foreign sources, but because the foreign currency lending rate plus the exchange rate in VND is still lower than that in VND. According to the SBV, USD lending rates are currently around 2.8-6% per annum, which means short-term interest rates are popular at 2.8-4.7% per year, as are interest rates on medium and long term loans at 4.5-6% per year. Meanwhile, for VND, lending rates are commonly at 6-9% per annum for short term; 9-11%/year for medium and long term.

Must be balanced

According to the SBV, with the exchange rate and the stable foreign exchange market, interest rates on USD deposits will remain at 0% per year, and the psychology of holding foreign currencies in organizations and with people will decrease. Evidence is that the rate of "dollarization" in Vietnam has decreased from 11.06% in 2014 to 8.21% as of 31st December, 2017. The system of credit institutions has shifted from net-selling to buying foreign currencies since 2016, enabling the State Bank to buy large amounts of foreign currencies in addition to the State's foreign exchange reserves. To date, the state's foreign exchange reserves have reached about 64 billion USD, the highest in many years.

According to experts, these are positive figures, remarkable in the efforts to combat "dollarization" by the State Bank. Therefore, if there is positive support from macro-economic conditions, such as with the country returning to trade surplus, the exchange rate will be stable, and interest rates in VND will be reduced as directed by the Government..., the demand for foreign currencies of organizations and enterprises will decrease, helping to balance, bringing the foreign currency credit rate to the allowed level. Not only that, with the current foreign currency reserves, the SBV is quite capable of banning foreign currency loans, although it should not last for many years, while ensuring the prestige of the national bank and to help stabilize the economy, so as to avoid the implications when the rate of "dollarization" increases too much.

Because of the implications for foreign currency credit growth, the SBV said it would continue to implement measures to attract foreign currency sources into the banking system, through operation with foreign currency exchange agents and the policy on buying and selling foreign currency cash of credit institutions with individuals and organizations. These solutions are expected to contribute to the conversion of foreign currency resources into production and business, and to create an increased supply of foreign exchange reserves.