The foreign exchange market stabilised in the past week thanks to the central bank’s firm hold on its official rate, even though several local banks edged up their rates on dollar savings, bankers said. Since September 20, several Vietnamese banks have started raising the dollar rates to match the US Federal Reserve’s move in which it hiked its rate to 1.75% from 1.5%.
As of October 7, HCM City-based Sacombank, Vietnam’s largest semi-private bank in term of registered capital, had increased its rates by 0.15 to 0.3% and is now paying 1.55% per year for one-month savings.
“The higher rates, however, do not have any impact on the dollar/dong market as residents still do not very much shift from the dong to the dollar,” a dealer at a foreign bank in HCM City said on Monday October 11.
While banks pay up to 3% a year for dollar savings, given the central bank’s forecast on the dong/dollar devaluation for the whole of 2004 at 1%, bankers said it was better to keep the dong which yields around 8%. Early this month rating agency Standard & Poor’s reaffirmed its long-term foreign currency sovereign credit rating for Vietnam at ‘BB’ and its long-term rating on the Vietnamese dong at ‘BB’. It said the outlook was stable.
State media on Monday quoted a central bank report as saying no more rate hikes were expected from the Federal Reserve between now and end of the year as the US economy would see no major spurts in growth in the remaining months of the year.
Gradual dong devaluation
The report said the central bank’s forex sales had helped stabilise the dollar/dong rate. The dong devalued against the dollar by 0.62% in the first 9 months of 2004, compared with 0.87% in the same period last year, the report said. “The exchange rate will be kept relatively stable in order to avoid negative impacts on the economy while helping the target of encouraging exports and controlling imports,” the Dau Tu newspaper cited the central bank report as saying.
While dong lending demand remains strong in Vietnam, where the economy grew 7.5% between the first nine months of last year and the same period this year, banks are not facing a liquidity crunch thanks to the central bank’s cash supply. On Monday state-run banks were offering overnight lending rates on dong loans at 5.3% to 5.6% on Monday, slightly down from 5.3% to 5.8% last week.
As of October 5, the central bank had injected nearly 27 trillion dong ($1.7 billion) worth of cash into banks via buying their debt paper, nearly triple its purchases for the whole of 2003.
Bankers said a proposal raised last week at the Asia-Europe Business Forum on using more euro and yen for trade instead of the dollar could boost banks’ profits but local businesses might not be able to easily adapt to such a change. “This is an opportunity for banks but it’s tough for companies which have been used to dollar/dong forecasts and accounting,” said a bank dealer.
Even though trade between Vietnam and the 25 members in the European Union totals 6.4 billion euro in 2003, or 17% of Vietnam’s overall trade, local firms have to use the dong in their accounting.