SBV forex reserve requirement increase pressures on lending rates

The move to increase the foreign currency compulsory reserves by the State Bank of Vietnam (SBV) will help to stabilise the VND/USD exchange rate and increase Vietnam’s forex reserves, but will put pressure on lending interest rates.

On April 9, the State Bank (SBV) issued a decision to raise reserve requirement in foreign currency by 2 percent and ceiling dollar deposit rate was capped at 3 percent per year.

Increasing the forex reserve requirement and capping the foreign currency ceiling interest rate at below 3 percent is aimed to reduce the attractiveness of holding foreign currencies.

Currently, the interest rate difference between dong and US dollar is about 11 percent, so the dollar will be only more attractive than dong if the local currency devalues 11 percent against the dollar this year.

Meanwhile, the scenario of the dong depreciated by 11 percent, meaning the exchange rate at about 23,300 dong/dollar by the end of this year seems unlikely.

Undermining the attractiveness of the dollars would reduce the speculation and holding the greenback, thereby also reducing the volatility of the exchange rate. People and businesses will sell the foreign currency to commercial banks. SBV may also purchase foreign currencies, especially US dollar to increase foreign exchange reserves.

Although the increased reserve requirement will not have a strong impact on the local currency, this is still a good tool to control inflation. Increasing the forex reserve requirement will reduce the growth of credit in US dollars, then reduce overall credit growth.

Dong‐denominated interest rates are currently very high and very difficult for people and businesses to borrow. Many businesses find the way out by borrowing in dollars with lower interest rates and easier. With the increase in the foreign currency reserve requirement will cause interest rates for loans in foreign currencies to increase, enterprises will find it more difficult.

Increasing the required reserve ratio in the greenback and dollar interest rate control will affect business activities of commercial banks. The banks with a large proportion of foreign currency credit will be strongly influenced by the increased cost of capital. In addition, foreign currency lending credit reduction also affects the profits from their business activities. – Vietbiz24

Tags: Vietnam banking industry, Vietnam finance, Vietnam financial