Currently, banks offer the interest rate on three-month term VND deposits at 7.5-8.4% per annum, and offer the rate on US$ deposits of the same term at 4-4.5% per annum. If the scenario with the VND/US$ exchange rate seen in previous years repeats in 2007, the local currency will lose 1% in its value, and the devaluation level will not be more 0.5% from now to the year’s end.

It’s profitable to keep VND

If you have VND100mil ($6,250) and you make a deposit in VND at banks, you will get the sum of money of VND102.1mil, including the principal and interest. Meanwhile, with the same sum of money, you will get VND101.5mil only if you make deposit in US$. Depositors may find the gap between VND102.1mil and VND101.5mil a relatively big gap, especially when considering what happened in recent years.

Statistics show that in the last five years, the average interest rate of VND deposit was 7.5% per annum, while the rate on US$ deposits was 3% only. Meanwhile, there were no big fluctuations in the VND/US$ exchange rate: one dollar was converted to VND15,081 at the end of 2001, while the rate was VND16,101/US$1at the end of 2006.

As such, with the investment of VND100mil, one would get the sum of VND143.6mil after five years if he makes VND deposit, while he would get VND13.8mil if he makes US$ deposit, which means a gap of 3.2% in profit.

What to keep, VND or US$ for long term?

It would be more profitable to keep the local currency. However, many Vietnamese people still prefer keeping dollars. Banks say that 30% of their mobilised capital is in foreign currencies, a very slight decrease if compared to the figure of five years ago.

The VND/US$ exchange rate proves to be relatively stable in recent years. However, if keeping a broader view, in the last 20 years, the VND several times incurred devaluation (VND lost several tens of percent every time). That explains why Vietnamese people still hesitate to keep VND: they fear that the scenario of VND devaluation may repeat.

Meanwhile, statistics also show that most deposits came from overseas remittance, i.e. the money sent by Viet Kieu in many countries in the world to their parents and relatives in Vietnam. With the big sums of overseas remittance, estimated at several billions dollars a year, it is absolutely understandable why such a big sum of foreign currencies is still being deposited at banks.

Regarding the future of the dollar in Vietnam, the dollar now seems to be short since the central bank has bought a big volume of dollars, while the demand for dollars keeps rising when enterprises’ demand for foreign currencies is always high at the year’s end.

However, the pressure on revaluating the dollar may be eased as the central bank may reduce the volume of dollars it will buy, or even consider selling dollars to stabilise the market. Moreover, it is very likely that the US FED will cut the interest rate. Therefore, there are no signs of the sharp devaluation of the local currency, and people should think of the possibility of the VND’s revaluation.

Of course, it may happen that the local currency will be weaker, though the possibility is very low. This will occur only if the investment flow into Vietnam cannot make profit and Vietnam cannot pay debts. If so, the national economy will become weaker, which will then weaken the local currency.

What about inflation?

One might say that the inflation rate should be considered when considering which currency to keep, VND or US$.

Returning to the above example, if keeping VND, a holder will get VND143.6mil for the initial capital of VND100mil, while if keeping US$, he will get VND123.8mil only.

If including the inflation rate in these five years, the two figures will become VND106mil and VND91.3mil, which would mean that keeping VND would still bring higher profit, though the profitability is relatively low. One should be reminded that the holders of US$ would still bear the inflation as they still have to convert into VND for spending.

In general, in the immediate time and the next three years, it would be more profitable to keep VND than US$. Of course, people can keep other kinds of foreign currencies, but they should be reminded that the risks are very high as the fluctuations in the exchange rates between VND and other foreign currencies, except US$, are very big.

Source: Tuoi tre.