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High interest rates in VND can also increase dollarization


According to experts, if the State Bank can stop the situation of "going to night" with customers of commercial banks, the policy of capping USD 0% deposit interest rate may work, although it will take time to People convert assets from USD to VND.

 

A report by the National Association of Realtors (NAR) said that in 2017 Vietnamese ranks sixth in the top ten countries with US housing buyers. According to statistics, from April 2016 to March 2017, the Vietnamese spent about $ 3.06 billion to buy real estate abroad, mostly home in the United States.

Meanwhile, the Government has many times asked the SBV study resource mobilization measures gold and foreign currency in order to put into production the people business serving the economy.

With the goal of raising USD in the population, many experts believe that the SBV should apply the interest rate back to USD deposits to encourage capital flows.

Discussion around this story we had a talk with TS. Nguyen Duc Do, Deputy Director of Institute of Finance and Economics, Academy of Finance.

Reporter: Sir, the last few days, the story "foreign currency bleeding" abroad again raised that many experts say should be reintroduced dollar deposit interest rates. Do you agree with this idea?
TS. Nguyen Duc Do
: I do not think that the story of "bleeding foreign currency" abroad such as the press information of the past few days closely related to the policy of imposing USD deposit rates at 0% of the State Bank. If people's goal is to find a profit, they can deposit in VND at 5% instead of US $ at 1% interest rate, because exchange rate risk in the past 5 years Only about 2% per year, while sending money abroad is very complex, risky and also cost is not small.

The money flowing abroad to buy real estate can have other purposes, such as preparation for resettlement abroad, or serving the education of children ... These people a lot of money as well There will be a need to diversify assets in different places, and this does not depend on the fact that the USD interest rate increases by several percentage points.

If such holdings are so profitable, why foreign currency credit in the first 6 months of 2017 increased faster than the same period?
In my opinion, the problem is that VND interest rates are currently quite high, averaging 7% in 2016, according to the World Bank. If the exchange rate risk is only about 2%, businesses will be willing to borrow dollars at interest rates of 4-5% and commercial banks will be willing to mobilize USD with interest rates of 1-2%.

Because of high interest rates and central bank VND not tightly controlled state law evading paying dollar deposit interest rates of commercial banks, so the new dollarization increased recently. When the dollar depreciated sharply on world markets in the first 6 months of 2017 the demand for foreign currency credit has increased, by then all that the risk of exchange rate this year is not too large.

So raising the ceiling interest rates on dollar deposits will have an impact on the market and the economy?
If commercial banks are still present dollar deposit with an interest rate of about 1-2%, then raising the interest rate cap on dollar deposits from 0.25 to 1% level will not solve the problem. If the rate goes up to 2% or higher, VND interest rates will be hard to fall to support the economy. With USD credit available at just under 10%, the reduction of VND interest rate obviously needs to be prioritized.

So, you support the policy of consistently keep USD interest rate cap at 0% of the SBV?
If the SBV can prevent nightclubs with clients of commercial banks, the policy of capping the 0% USD deposit interest rate may work, although it will take time for people to convert their assets. From USD to VND.

However, if the VND interest rate decreases, such as down to 5%, then businesses will only be willing to borrow USD at interest rates of 2-3% and commercial banks will push the US dollar interest rates to levels 0% without the SBV imposing a ceiling.

If VND interest rates remain at 2.5-3%, most people will probably still choose to send VND, because holding USD in the country with 0% interest rate is still less attractive, It is not advisable for foreigners to take interest rates of 1% if the risks and costs are taken into account.

 

Kim Tien
According to Young Intellectuals

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