Decision 1938/QD-NHNN, issued by the State bank of Viet Nam in 2015, cut the ceiling on interest banks paid on dollar deposits by organisations and companies from 0.25 per cent to zero, and by individuals, from 0.75 per cent to 0.25 per cent.

The central bank’s move was aimed at preventing the hoarding of the greenback.

It has apparently worked and dollar deposits have decreased significantly.

According to the HCM City Statistics Office, in the first 11 months of the year the deposits in foreign currencies decreased by 9.15 per cent as compared to the same period last year, and accounting for only 12.03 per cent of the city’s total bank deposits.

But the question is, is it time for the central bank to rethink its zero interest rate policy?

There have recently been signs of a foreign exchange shortage, especially after the US Federal Reserve decided to increase interest rates.

On December 14 it hiked the rate by 25 basis points, and said there would be three more hikes in 2017, though it is only indicative and may or may not happen.

The interest rake hike has pushed the dollar to its highest level in 14 years.

Analysts said the rate hike would encourage foreign investors to withdraw their money from developing markets like Viet Nam to invest in the US.

This would have an impact on Viet Nam’s foreign exchange reserves.

The appreciation of the dollar has also been blamed for a slight decrease in overseas remittances to Viet Nam in recent times.

According to the SBV’s HCM City branch, as of November overseas remittances to HCM City this year were worth around US$4.3 billion. It is estimated to rise to $5 billion for the year, down by around $500 million from last year.

The higher dollar interest rate has caused many people to keep their money in the US instead of remitting it to Viet Nam, where the interest rate on dollar deposits is zero per cent. Remittances from the US account for 60 per cent of the total inward remittances to Viet Nam.

The drop in remittances will affect the availability of foreign exchange for production and business activities, particularly imports.

Besides, the lack of any clear progress in the Trans-Pacific Partnership (TPP) deal also means a reduction in investment in Viet Nam.

Besides, loans in foreign currencies are increasing, thus reducing banks’ foreign currency reserves.

According to the SBV, by November 28 banks’ foreign currency loans had risen by 3.49 per cent for the year.

The balance of trade has been adverse with country posting a deficit of $700 million in just the last two months, which is also putting pressure on the foreign currency reserves.

In the face of this situation, analysts said the central bank should consider slightly raising the interest rate on dollar deposits by individuals to mobilise more dollars especially to serve trade.

But they admitted that any adjustments must be carefully considered since the zero interest rate has helped reduce the hoarding of dollars, thus stabilising the foreign exchange market.

Banks in year-end rush to lend

Recently the Agricultural and Rural Development Bank (Agribank) announced a VND50 trillion (US$2.22 billion) preferential credit package for clean agriculture.

Interest rates in this credit package will be 0.5-1.5 per cent lower than normal.

It is targeted at enterprises, co-operatives, co-operative unions and farmers producing safe agricultural products.

VietinBank has signed credit support contracts worth VND33 trillion with 104 companies based in HCM City.

SHB is offering preferential loans at 6.5 per cent to enterprises and their employees.

Market observers said banks were vying with each other to lend by launching several preferential credit packages despite the fact that some of them had almost achieved the year’s credit growth targets.

By mid-December banking credit growth for the year was 15 per cent.

The National Financial Supervisory Committee estimates it would reach 18 per cent by year-end, with the property sector accounting for 8.4 per cent of new loans and consumer loans for 11.l4 per cent – after growing by a whopping 39 per cent.

Analysts said the credit growth rate could exceed the 19 per cent target if the central bank agrees to increase the quotas it sets for each bank. 

Some warned that rapid credit growth would pose a risk to medium-term financial stability, particularly since the credit/GDP ratio stood at 110.5 per cent last year.

Banks’ bad debts had not been resolved and continued to affect the financial capability of many of them. Rapid growth in credit could increase the bad debts, they warned further.

Corporate bonds become popular                  

This is considered the year of corporate bonds after enterprises including banks managed to raise more than VND50 trillion (US$2.22 billion) from the market.

Many banks made one successful bond issue after another, raising huge amounts to bolster their tier 2 capital.

In other words, bonds have become an effective tool for banks to improve their capital adequacy ratio (CAR).

Asia Commercial Bank (ACB) collected over VND285 billion from 27 individual investors and VND1.715 trillion ($76.22 million) from 7 institutional investors for a total of VND2 trillion ($88.89 million).

Vietcombank (VCB) raised VND1.55 trillion from individual investors, and VND450.5 billion from institutional investors to also total VND2 trillion in bonds.

Securities companies also achieved encouraging results in issuing bonds to investment funds and individual investors, raising around VND2 trillion in all.

Vingroup, Viet Nam’s biggest listed property developer, raised VND3 trillion ($134.1 million) from a domestic bond issue.

The fixed-rate, unsecured senior bonds are backed by the Credit Guarantee and Investment Facility, a trust fund of the Asian Development Bank. 

The five- and 10-year bonds, with annual coupon rates of 7.75 per cent and 8.5 per cent respectively, helped Vingroup raise cheap capital for its long-term investments.

Vingroup was hailed by economists for successfully raising a huge sum from its bond issue despite being a private enterprise and getting the backing of a prestigious international financial organisation like the ADB.

The market also saw the Trading and Service Investment Joint Stock Company (Vicentra)  successfully issue bonds worth VND3.9 trillion for developing its Vinhomes Golden River Project.

In early December Viet Nam Electrical Equipment Joint Stock Company (GEX) made two issues of three-year warrant-linked bonds worth a total of VND1.8 trillion.

The warrant refers to equity that can be detached and sold.  

Analysts said the company’s issue of the warrant-linked bonds helped improve the diversity of the bond market in 2016.

Another difference in this year’s bond market was that issuers enlarged the list of investors they wanted to tap.

They focused on individual investors and enterprises instead of only professional bond investors as they used to in the past.

In the last few weeks of the year corporate bonds issuances have shown no signs of a let-up.

Some analysts are concerned about possible defaults by issuers.   

In 2014 the Government issued a decree on setting up a credit rating agency, a positive sign for the market and investors since it would boost transparency in the debt market and protect investors.

But no agency has been set up yet and bonds are not rated by independent rating organisations. As a result, Viet Nam’s bond market lags far behind global standards.

Investors themselves have to assess an issue and its issuers if they want to buy. Consequently, individual investors, many of whom lack experience, run the greatest risk.— VNS