VND interest rates down, but US dollar loans remain attractive

The dong lending interest rates have been decreasing after the State Bank of Vietnam showed its determination to slash interest rates, while the dollar tends to increase slightly. However, dollar loans remain more attractive in the eyes of businesses.

Vu Dinh Anh, a well-known economist, said that businessmen have consulted with him about if they should borrow in dollars or Vietnam dong since the dong interest rates have been decreasing.

“If you can earn dollars to pay bank debts, I replied, you should borrow in dollars, because the dollar loan interest rates are still lower than the dong interest rates, even though the dong interest rates have been eased (7-8 percent per annum vs 17-19 percent per annum). However, if you cannot earn dollars to pay debts, you should be cautious with the exchange rate fluctuations,” Anh said.

Anh gave the advice, because, though the consumer price index (CPI) in August 2011 increased by 0.93 percent only, the lowest level over the last one year, the CPI in the whole year 2011 would be still high at 23 percent, if the CPI increase in the last four months of the year, it is the same as the CPI increase in the first eight months of the year (1.96 percent per month).

The best inflation scenario for Vietnam is that the CPI increase in the last four months of the year would be just equal to that in the last three months (1.06 percent per month). If so, the CPI of the whole year 2011 would be abut 20 percent.

With such the predicted CPI increases, one should not expect the lending interest rates to decrease to the levels below the current average interest rate (18.6 percent per annum). Therefore, it would be more profitable to borrow in dollars instead of Vietnam dong.

However, Anh has warned businesses that if the dollar prices increase sharply, enterprises would face a high risk.

General Director of VP Bank, Nguyen Hung, has admitted that his bank does not dare to offer the deposit interest rates higher than 14 percent per annum, because the central bank has threatened to impose heavy fines on those banks who mobilize capital from the public at over 14 percent.

However, Hung believes that very few banks would slash the deposit interest rates to below 14 percent, because they understand well that the demand for loans would increase towards the end of the year. If banks slash interest rates too sharply, they would not be able to mobilize capital, which means that they would face the liquidity problem.

With the average interest rate of 14 percent, the actual capital mobilization cost would be 18-19 percent per annum after banks pay compulsory reserve ratios, management fee and other kinds of expenses,.

“Therefore, in the next two or three months, no bank would offer the lending interest rates of below 17 percent per annum,” Hung said.

He went on to say that VP Bank, though listed as one of the 12 biggest banks, has only reserved 3000 billion dong for the program on lending the enterprises in the fields of production, forestry and farm produce export, healthcare and education at the preferential interest rates of 17-19 percent per annum.

Meanwhile, Pham Quang Trung, Director of the Dong Bang Trade and Service Development Company, said that even if borrowing capital at the preferential interest rates, businesses still find it difficult to maintain business and pay bank debts.

Like many other businessmen, Trung has expressed his worries that the preferential interest rates of 17-19 percent per annum could be maintained for a long time, because it is unpredictable about the CPI increases in the last months of the year.

The big gap between the dong and the dollar loans, plus the success of the State Bank of Vietnam in stabilizing the dong/dollar exchange rate has prompted businesses to borrow in dollars instead of dong. This has resulted in the sharp increase of 23.91 percent in the foreign currency credit in the first eight months of the year in comparison with the end of 2010, and the modest increase of 8.15 percent of the dong outstanding loans.

“I still advise businesses to borrow in dollars instead of dong, if the dollar price keeps stable. However, businesses should think carefully before making decision, because the dollar price tends to increase towards the end of the year,” said Dr Dinh The Hien, Director of the Information Technology and Applied Economics Research Institute.

Tags: Vietnam banking industry, Vietnam finance, Vietnam financial, Vietnam interest rates