The level of dollarization of an economy is based on the ratio of foreign currency deposits to total money supply (M2), or total deposits; and the ratio of outstanding foreign currency loans to M2, or total outstanding loans.
According to IMF, a country with a ratio of foreign currency deposits to M2 of more than 30 percent would be considered to have a high dollarization level.
Reducing dollarization, and the speculation and hoarding of foreign currencies helps the financial market work effectively. More importantly, the reduction in dollarization will ensure currency security for the Vietnam economy.
That is why the State Bank of Vietnam (SBV) has been persistent in fighting against dollarization for many years.
SBV on October 1 told commercial banks to stop providing medium- and long-term loans in foreign currencies to businesses to make payments for import goods and services.
Under Circular No 42/2018, Vietnam will step by step switch from mobilizing and lending to buying and selling foreign currencies. The subjects eligible for borrowing foreign currencies have been narrowed.
|Reducing dollarization, and the speculation and hoarding of foreign currencies helps the financial market work effectively. More importantly, the reduction in dollarization will ensure currency security for the Vietnam economy.|
“This is the government strategy to develop the banking sector by 2025 and 2030. Vietnam needs to stop lending in foreign currencies, for the short term in the immediate time, and then for medium and long term. There is a detailed roadmap for the implementation of the strategy,” said Dao Minh Tu, Deputy Governor of the State Bank.
Vietnam has many effective tools to fight against dollarization. Forex reserves have reached a record high of $70 billion. The current Vietnam dong interest rate and the stable dong/dollar exchange rate will help import/export companies more easily buy and sell foreign currencies.
As analysts have pointed out, businesses do not have reasons to continue borrowing foreign currencies as the dong value has been stable for many years.
In the past, they preferred borrowing money in dollars because the dollar lending interest rate was much lower than the dong interest rate. But the big gap between dong and dollar interest rates no longest exists.
Meanwhile, the dong/dollar exchange rate at the end of August was nearly unchanged compared with the beginning of the year. In ASEAN, the Vietnamese dong is the only currency that is stable in comparison with the dollar in the context of the Chinese yuan devaluation against the greenback.
This rarely happens with the Vietnamese dong as Vietnam always has a trade deficit with China
From October 1 lenders including banks will not be allowed to provide medium- and long-term foreign currency loans to businesses to pay for imports.
The Vietnamese dong has gained some strength against the US dollar in the past month, helped by abundant domestic supply and favourable global conditions.