Pressure from the foreign currency lending termination

22-May-2019 Intellasia | Dien dan Doanh nghiep | 6:00 AM Print This Post

According to Circular 42/2018/TT-NHNN, by the end of September 30th, credit institutions (CIs) will terminate the medium and long-term foreign currency lending to make overseas payments for importing goods and services when borrowers have enough foreign currency from their production and business revenues to repay the loans until the end of September 30th 2019.

Previously, from April 1st 2019, CIs have ended the lending of short-term foreign currency loans to make overseas payments for importing goods and services to serve domestic consumption when customers have enough foreign currency revenues from production and business revenues to pay for the loans under Circular 42.

However, foreign currency credit has not decreased but increased sharply in the early months of 2019. According to the latest statistics of the State Bank of Vietnam (SBV), as of April 17th 2019, foreign currency lending rose by up to 7.62 percent compared to the end of 2018, two times higher than the overall credit growth rate (3.23%) and nearly 2.6 times higher than the credit growth of domestic currency (2.93%). This growth rate was also much higher than it was in the same period of 2018.

Dr Can Van Luc Chief Economist at Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV) said that the strong rise of foreign currency lending was mainly due to businesses’ acceleration of foreign currency lending before the deadline to stop foreign currency loans, making the foreign currency lending in the first quarter (Q1) of 2019 to increase fairly significantly. However, it did not considerably affect the foreign currency liquidity because in Q1, the banking system mobilised a fairly good amount of foreign currency, up by about five percent.

Reports of banks also clearly shows that when the slight increase in short-term foreign currency lending in the first months of the year was mainly due to the borrowings of exporters and importers for making payment for imported goods and services to serve domestic demand and to produce and trade export goods.

The rise of foreign currency lending in the first months of 2018, despite being much lower than 2019, was already considered a risk by the SBV which led to the agency’s proposal to stop lending in foreign currency for the above two types of demands.

Short-term exchange rate pressure

According to experts, the termination of foreign currency lending will force businesses in need of foreign currency to buy foreign currency to pay for imported goods, therefore putting pressure on foreign currency demand in the short-term. Nevertheless, in general, it does not change the foreign currency demand of the economy, because many domestic production and business firms have no foreign currency revenue, and they are not eligible for borrowing foreign currency from banks. An expert analysed that businesses borrowing foreign currency must have to buy foreign currency to repay the loans sooner or later. It means that the foreign currency demand is unchanged, and the difference is whether the demand comes early or later.

In addition, the termination of foreign currency loans may cause businesses to borrow dong at higher interest rates (by about three to four percent per annum) to buy US dollars to pay for import orders. However, if including the exchange rate risk when borrowing US dollars, the cost of borrowing dong of businesses will not increase much.

Regarding the exchange rate trend in the near future, general director of HSBC Vietnam Pham Hong Hai said that the strong depreciation of the Chinese yuan against the US dollar and the escalation of the US China trade war have affected the sentiment of investors, making the US dollar/dong to be under the pressure of increasing. Nevertheless, the rise of the exchange rate will be just around two to three percent this year.

Bao Viet Securities Company (BVSC) also maintained its point of view that the exchange rate in 2019 will be kept stable with a devaluation level of less than two percent, as the foreign exchange reserves of Vietnam are at high level and the SBV is capable of adjusting the exchange rate when there are unexpected fluctuations.

Nevertheless, Dr Luc from BIDV recommended businesses to pay more attention to exchange rate risks by diversifying the types of foreign currencies for making payment, instead of just using the US dollar. At the same time, businesses should use the exchange rate hedging products of banks, particularly derivative instruments, such as forward, swap and option contracts. In addition, businesses also need to closely observe the market, diversify their markets, including boosting the domestic market.

 


Category: Finance, Vietnam

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