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Calm heads prevail as the forex market to remain cool

With its first move to regulate dollar denominated lending activities, the State Bank has sent a strong signal to keep the exchange rate stable till the year’s end.

Last week, the central bank decided to increase the reserve requirement ratio by 1 per cent to 8 per cent for foreign currency deposits less than 12 months and to 6 per cent for foreign currency deposits over 12 months.

That means for each $100 mobilised in less than a 12-month term, a bank must give $8 to the State Bank instead of $7 as reserves.

Nguyen Thanh Toai, deputy general director of ACB, said this would force local lenders to lift dollar lending interest rates.

The State Bank also requested local lenders apply strict foreign currency lending to limit clients who do not have enough dollar denominated revenues from business operations.

“The State Bank will inspect banks with high dollar denominated credit growth,” the authority noted.

Nguyen Thi Kim Thanh, head of the central bank’s Banking Strategy Institute, said this was the right move to address high dollar credit growth.

“With dollar lending rates less than half of Vietnam dong lending rates, the gap is too large. Now with this reserve ratio hike and efforts to pull down Vietnam dong lending rate, the gap is narrowed,” said Thanh.

For a few months, local financial experts expressed concerns over possible surges in dollar demands by the end of 2011 as dollar borrowers have to source greenbacks to return due loans.

In March, the State Bank already increased the foreign currency reserve requirement ratio by 2 per cent to 4-6 per cent to limit the foreign currency lending. However, by end of August, while Vietnam dong credit growth was less than 3 per cent year-to-date, the figure for dollar credit was almost 25 per cent.

Marc Djandji, director of research at Viet Capital Securities Company, was concerned about foreign exchange stability following a dong interest rate decline. “The decision to raise the reserve requirement ratio of foreign currencies suggests that the central bank is also targeting a stable exchange rate as it signals that it wants to control dollar speculation. However, from now until the year’s end, the central bank might have a tough time keeping the Vietnam dong stable especially if it goes through with reducing Vietnam dong interest rates and considering the demand for dollars once the loans that have been taken out since early this year need to be repaid,” said Djandji.

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