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Dong, dollar options

07-Jan-2007 Intellasia | 31-MAY-2004 Dau Tu Page 7 | 2:21 PM

Notably, people had been becoming used to depositing dong at banks in the last two years instead of holding on to US dollars, as was the case in the past. But now the consumer price index has climbed 6.3% and the dong has weakened about 1.5% against the US dollar, both of which is eroding the value of bank dong deposits.

If the CPI rate continues to rise unabated and dong deposit interest rates is not increased, then it is likely depositors will withdraw their funds and switch to the stronger currencies, the US dollar in particular.

According to figures of some state-run commercial banks, the amount of the US dollars deposited at banks in the first months of this year was still at a relatively low level and certainly not more than the same period last year whereas the amount of dong deposited at banks still remain at a high level. However, in April, the structure of deposits at banks started to shift. Specifically, US dollar deposits signalled a higher increase than the first three months. Although this does not mean depositors en masse are shifting from the dong to the dollar, some depositors have withdrawn large amounts of dong from banks to buy US dollars in the free market and then redeposit dollars at banks even though the interest rate on US dollars is far lower than the dong.

One banker said that depositors should not be hasty to withdraw dong to buy US dollars or any other strong foreign currency to redeposit at banks. At present, the US dollar is depreciating against other foreign currencies and in the near future, it is likely that the US dollar will not recover as the US Federal Reserve is still keeping bank interest rates at historic lows of 1% a year.

In the domestic market, because of low international interest rates, most commercial banks have a dollar deposit interest rate of around 2% a year and the depreciation of the dong and the the US dollar this year, as anticipated by the governor of the State Bank of Vietnam Le Duc Thuy, will possibly end the year at around 1% lower than the previous annualised weakening of 2%.

Some bankers still maintain that as analysed for the domestic market, depositing the US dollars is not as advantageous as the dong. If so, then why are more and more dong depositors shifting to the dollar?

The chief of a state-run commercial bank explained that the main cause is still due to the psychology of depositors. They think that the US dollar is considered the most stable currency for deposits beside gold. In addition, two years ago, the US Federal Reserve managed to make an upward move on its interest rate to regain value of the weaker US dollar, which would make US dollar deposits more advantageous than the dong so it is thought that the US dollar as the most stable currency for deposits beside gold is easy to understand. Furthermore, people generally think that although the US dollar has weakened against other major currencies, the US is still a very powerful economy and the recovery of the US dollar will surely happen soon.

The above analysis shows that at present, dong deposits at banks is still more advantageous than the US dollar. In addition, to protect the interest of depositors, the SBV said it is carrying out a policy of “positive net deposit interest rate” where the net deposit interest rate must be higher than the inflation rate.


Category: Finance

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