Viet Nam has attracted $8.7 billion this year in FDI in 1,408 projects as of July 20. — Photo VNA

Viet Nam's foreign exchange reserves, inclusive of gold, hit a record high of US$38 billion in mid-June, according to HSBC's Macro-Prospect Report.

The State Bank of Viet Nam bought roughly $8 billion worth of dollars in the first 5-1/2 months to increase foreign reserves.

The important sources of the greenback were foreign direct investment and remittances.

According to the General Statistics Office, as of July 20 Viet Nam had attracted $8.7 billion this year in FDI in 1,408 projects.

Other sources included remittances by overseas Vietnamese, money spent by foreign tourists, and salaries of Vietnamese working for foreign companies.

Of them, remittances were the most important contributor.

Thanks to the Government's policy of liberalising current account transactions, remittances from abroad have been increasing in recent years.

The State Bank of Viet Nam's HCM City office said remittances to the city in the first half of this year rose 3 per cent year-on-year to $ 2.1 billion.

They are forecast to reach around $5.7 billion for the full year due to the city's rapid economic recovery.

The figures indicate that Viet Nam is likely to be among the countries with the highest remittances in the world.

The foreign exchange reserves are high also because individuals and organisations are actively selling out their dollar holdings due to low inflation, steady exchange rates and the many anti-dollarisation policies adopted in the past few years.

Average inflation in the last seven months has only been 1.81 per cent. The US dollar fell by 0.21 per cent in July as the central bank's decision to scrap interest on dollar deposits encouraged people and organisations to switch to the dong.

The plentiful foreign exchange reserves are of great significance for an economy since it enables the Government to intervene in the market whenever necessary to influence rates, according to analysts.

But the rapid increase in the reserves also indicates that the economy is weakening as is its ability to absorb capital, including foreign exchange.

One indicator is the fall in imports, 90 per cent of which are feedstock, intermediate goods and machinery to serve manufacturing.

In the year-to-date imports have been worth $95.03 billion, a decrease of 0.9 per cent.

Another concern is that the central bank has had to pump large amounts of dong to mop up the foreign currencies, which brings inflationary pressures to bear.

Foreign banks make beeline for VN

Last week the State Bank of Viet Nam approved in-principle Woori Bank's proposal to set up a wholly-owned bank in the country.

The largest South Korean bank in terms of consolidated assets as of the end of March has been told to apply for a licence.

Once it gets the licence, Woori expects to be a vehicle that will help expand South Korean investment in Viet Nam. It will also be the seventh wholly foreign-owned lender in the country after HSBC, Standard Chartered, ANZ, South Korea's Shinhan Bank and Malaysia's Hong Leong Bank Berhad and Public Bank Berhad, with the last-named licensed earlier this year.

There are also branches of dozens of foreign banks.

The number of foreign banks, especially from ASEAN member countries, to invest in Viet Nam has been increasing rapidly in recent years with the opening up of the banking sector as part of the Government's commitment to international integration.

The number of foreign bank branches has gone up from 31 in 2006 to 50 now, and there are also representative offices of 50 banks and joint venture banks.

Market observers said that for long foreign lenders have sought to enter Viet Nam as wholly foreign owned, but they were not allowed to do so.

They then had to buy stakes in local banks to become strategic shareholders, set up joint ventures with domestic banks or open branches or representative offices.

For instance, VietinBank has two foreign strategic shareholders – International Finance Corporation and Koyo Mitsubishi UFJ.

In 2011 Japan's Mizuho Corporate Bank Ltd bought a 15 per cent stake in Vietcombank to become a strategic shareholder.

But the opportunity for foreign banks to establish wholly-owned entities in Viet Nam only arose when the banking sector was forced to restructure, which resulted in a sharp decrease in the number of banks from 33 in 2006 to 28 late last year.

This created conditions for foreign banks to expand their presence in what is a promising market.

Analysts have said that admittedly the presence of more foreign banks offers more alternatives to the public and has made the banking sector more competitive by ushering in improved management and greater transparency.

But the flipside, of course, is that domestic banks are in danger of losing market share or worse.

Foreign banks now have minor market shares – 5 per cent of deposits and 15 per cent of loans – but these are predicted to increase in the near future since the foreign lenders have now acquired better knowledge of the market and its demands to go with their deep pockets, high-quality, diverse products and efficient management.

The average size of Viet Nam's biggest banks is only $30-35 billion compared with $70 billion for major lenders in Thailand and Indonesia. Many banks in neighbouring countries also score double on the quality index that Vietnamese banks do.

The challenges Vietnamese banks face with the advent of their foreign rivals are that they would lose their advantages in retail banking, find it hard to compete in foreign exchange services and derivative products, and suffer from a brain drain as foreign banks, with their ability to pay higher salaries, poach the best and brightest.

Analysts said they should speed up the restructuring process to strengthen their financial capacity, improve their management, and change their income structure to fee-based rather than interest-based earnings.

They also said the lenders should explore ways to expand their investment abroad to exploit opportunities thrown up by international economic deals such as AEC and TPP. — VNS