The dong has gained a bit of ground against the dollar in the last days of April. For the first time in history, black market dollars are offered at less than the price quoted by commercial banks. This has helped commercial banks attract more foreign currency deposits. It has also dispelled exporters’ expectations that the dollar would keep rising and prompted exporters not to hoard so many of them. As exporters have started selling dollars for the dong they need to meet payrolls and other operating costs, the supply of dollars has been improved.

In such conditions, some firms judge it wiser to borrow dollars, not dong. An employee of the Thien Nghi Production and Trade Company in HCM City said that the company has borrowed in foreign currencies over the last three months, especially after interest rate ceilings were removed and the cost of borrowing dong soared.

The source explained why his company borrows in dollars. Thien Nghi is an export company. It has income in foreign currencies it will use to pay its debts to banks. Thus, by borrowing in dollars when it needs cash to finance raw materials or build up inventory, Thien Nghi reduces its foreign exchange risk – losses that could come if the dong/dollar exchange rate fluctuates.

That’s one reason. However, the most important motivator for Thien Nghi is that the interest rate quoted on dollar loans is as low as 1/3 of the interest rate quoted on dong loans, reflecting the market’s expectation that the dong will continue to lose value. That may happen, but in the short term, borrowing in dollars will help ease the financial burden on the company.

At Asia Commercial Bank ACB, for example, the dollar lending interest rate is hovering between four or five percent per annum, according to Deputy General Director Do Minh Toan. Meanwhile, the dong lending interest rate is at 14 to 16 percent per annum. Since the State Bank removed the cap on loan interest rates, formerly 12 percent, the dong interest rate has surged.

Toan agreed that it’s wise for export companies which have income in foreign currencies to borrow in dollars at this moment. Toan said that the dong is tending to gain on the dollar and fluctuations have been reduced – good signs.

The general director of a bank in HCM City said that the rate of growth in the amount of outstanding loans in foreign currencies has significantly increased, and has made big contribution to the rapid expansion of credit in the first quarter of the year. In his opinion, businesses have turned away from dong loans because they can no longer enjoy the four percent interest rate subsidy. [At the height of the financial crisis, the Government subsidized production loans as an anti-recessionary measure – VNNB].

According to the State Bank’s HCM City Branch, deposits denominated in foreign currencies increased by 4.12 percent during the first quarter of 2010. Outstanding foreign currency loans increased by 7.2 percent. Nguyen Hoang Minh, Deputy Director of SBV in HCM City, predicts that the demand for foreign currency loans will continue rising in the coming months, because the dong is gaining against the dollar.

Market analysts also believe that in the next three months, it would be better to borrow in foreign currencies than Vietnam dong.

In related news, commercial banks continue to pay relatively high interest rates for foreign currency deposits. Eximbank, for example, is paying four percent for 12 month term deposits.

Source: Dau tu Chung khoan