Vietnam’s Money Market: Stable But Worrisome

Unlike the same period of the previous year, this year, money market is quite stable.

Commercial banks are merely showing signs of dong interest rate race. Meanwhile, in some banks, signals of interest declining are becoming clearer. Long term deposit rate (more than 12 month term) of many banks got reduced by 0.5-1 October Less than 12 month rate remains at ceiling 9 percent but promotional programmes in the form of gifts and money have been lessened.

Increasing capital mobilization resulted in capital surplus at commercial banks

According to statistics of State bank of Vietnam (SBV), until 19 October 2012, credit growth rate of the banking system is 2.77 percent, of credit agencies is 14.02 percent.; especially, the number for dong is 17.52 percent. This helped the lending/deposit rate of the banking system, after a very long time always at above 100 percent, fall to below this level.

As calculated by the author, on 19 October 2012, lending/raising rate was only 97.03 percent. That means raised capital can finance borrowing demand.

For some other listed commercial banks, this rate is even lower than the average of the industry. This low lending/deposit rate, accompanied by higher total deposit growth than lending helped banks avoid interest rate race, even when the year is coming to end. ACB is the only commercial bank which has capital raising at September 2012 lower than early this year.

dong deposit increase due to SBV buy foreign currencies and gold.

After a long time of the bond issue postponing, since early October 2012, SBV has issued bonds several times. From 10 October to 7 November, SBV has issued 18.76 trillion dong to call back money. However, deposit to commercial bank, especially in dong still increased rapidly. The main reason is that SBV has spent a large amount of dong to buy deposit foreign currencies.

With the exception of late January and early February period, commercial banks have had the call price for US Dollar lower than SBV call price. Therefore, banks have two options: buy foreign currencies to sell to customers, or to sell to SBV. If foreign currencies supply source becomes too large, banks can’t maintain this foreign currencies state because with an interest rate of dong is higher than US dollar, the horizontal rate trend will make them lose. That is the reason why commercial banks will choose the option of selling foreign currencies to SBV

The amount of dong that SBV has supplied to the market through buying foreign currencies since early this year is about 210 trillion dong, of which commercial banks have only attracted a little by issuing bonds

At commercial banks, call rate of USD/VND at late October, early November still be lower than the price of SBV. This is the basis for the SBV to continue to buy foreign currencies and supply dong

dong interest rate will maintain this stability to the end of the year

Borrowing demand is low. The reason is that high inventory rate requires enterprises to find ways to consume. In addition, a total demand of the economy decreases restrains companies from speeding up their manufacturing. When bad debt rate is high, banks do not want to promote lending either. To have adequate risk provision, many banks even have to use all of their capital and banks which have alert bad debt rate can only think about restructuring.

SBV, with the role of state management agency, has identified all weak banks and implemented many solutions to control money market, including ensuring liquidity for banks. So banks won’t have to have interest race to assure liquidity like previous years.

Meanwhile, inward foreign currencies tend to increase. Total balance of payment surplus, thanks to overseas national currency exchange; low trade deficit force SBV to buy foreign currencies for reservation. This makes dong supplied to the market increase, lead to the liquidity redundancy of banks at the end of the year.

In terms of government management, money market tends to be stable when the year ends. But it would be better for the economy if this dong redundancy can reach companies and manufacturers. By 19 October, raising growth rate of credit agencies is 14.02 percent but this figure of the industry is only 2.77 percent

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