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People hang on to dollars despite low interest rates
Vietnamese are depositing money into US dollar bank accounts instead of VND accounts, despite the low interest rates banks offer for US$ deposits, because they expect the dollar to strengthen further against the dong.
Interest rates of both demand and fixed term US dollar deposits (less than 12 month term deposits) slid by another 0.2-0.3% per annum in the last week. Commercial banks now offer only some 2% per annum for US dollar deposits. However, US dollars still keep flowing into Vietnam’s banks.
Depositing in dollars, accepting low interest rates
Most commercial banks now have abundant US dollar holdings, and this has prompted them to slash the deposit interest rates.
Asia Commercial Bank (ACB) has lowered interest rates by 0.1% on all kinds of dollar deposits. Techcombank is now offering only 1.8-2% per annum for 1-3month term deposits, while Vietnam Tin Nghia Bank is offering the rates at 1.2-2.2% per annum. Meanwhile, the highest interest rate for US dollar deposits offered by Dong A (East Asia) Bank is only 2.4% per annum.
Even though the interest rates have become less attractive, in the first three months of 2009 the capital in foreign currencies mobilized by commercial banks in HCM City increased by 11.5%.
People still prefer making deposits in US dollar to dong because they believe the dollar will strengthen further. The dollar price on the black market has been rising since the end of February.
A top executive of a seafood company told VietNamNet that he cannot predict how the VND/US dollar exchange rate will perform in the near future. Therefore, instead of committing to sell dollars to banks to get the right to borrow dong at a low interest rate of less than 1% per annum, he has decided to borrow capital at normal high interest rates and keep dollars.
Like businesses, people are now also wavering between holding VND and keeping dollars. A lot of people hold dollars because they think that the dollar price increases will be high enough to offset the low interest rates.
The Deputy General Director of a HCM City-based commercial bank said that most people who receive remittances from relatives abroad (kiều hối) recently have deposited the money into foreign currency accounts at banks, while only a few have converted the foreign currencies into VND to enjoy higher interest rates.
US dollar interest rates on the decrease
Nguyen Phuoc Thanh, General Director of Vietcombank, said that commercial banks now have excessive stocks of US dollars, but they cannot lend them to businesses.
Businesses, he explained, fear the risk of exchange rate fluctuations, so they now prefer borrowing dong rather than US dollars. Further, borrowings in dollars do not enjoy the Government’s preferential rate of 4%.
Finance experts all believe that the excess of US dollar capital holdings at commercial banks will lead to further interest rate decreases on dollar deposits.
The experts said that domestic inflation is not a big worry now, therefore, depositors should not be too worried about the VND value. Meanwhile, the dollar price will not increase sharply as the State Bank of Vietnam has affirmed that it will stabilise the VND/US dollar exchange rate to maintain economic stability and meet macroscopic requirements.
According to Dr. Le Tham Duong from the HCM City Banking University, if people still want to make deposits in US dollar, they should make short term deposits, which allows them to adapt when the market circumstances change.
Duong said that people should not make long term deposits, since the US dollar interest rates may change from 2010, when the US demand stimulus measures impact the US economy and, coincidentally, the Vietnamese Government’s 4% interest rate subsidy programme is scheduled to end.
A number of experts are advising people to hold dollars in 9-12 month term deposits for now, thus securing higher rates than are paid on the 3-6 month term deposits. After that, people will have to reconsider the situation to decide which kind of deposits they should make.
Quynh Chi
vietnamnet
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