VietNamNet Bridge – Is there a relationship between the record high foreign exchange reserves and the record low credit growth rate?

The Governor of the State Bank of Vietnam, Nguyen Van Binh, has announced record high foreign exchange reserves of $35 billion, the highest peak in the last many years. The reserves increased by $10 billion within the first four months of the year alone.

In 2013, when asked about monetary policy for 2014, Binh said: “We will still be able to buy foreign currencies, but I don’t think we can buy much”.

However, the foreign currencies bought have far exceeded expectations. And it is undoubtable that the dong/dollar exchange rate will be stable until the end of the year.

However, two questions have been raised: Where are the profuse foreign currencies from? And is there any relation between the high foreign currency reserves and the low credit growth rate.

There are three visible foreign currency supply sources. First, people convert US dollars into dong. Second, commercial banks have withdrawn a part of the $4.3 billion they deposited at foreign banks. Third, the disbursement of the foreign direct & portfolio investments, and overseas remittances.

In fact, there is another channel, through which foreign currencies have flowed to Vietnam: foreign loans. Domestic enterprises, especially foreign-invested ones, now tend to borrow money from foreign sources, including from holding companies, to enjoy lower interest rates, rather than from Vietnamese banks.

No enterprise wants to borrow dong from Vietnamese banks, even though the dong interest rate has dropped from its peak of 15 percent to 6-7 percent, if they can approach foreign loans at 2.5-3 percent per year.

In order to buy foreign currencies in large quantities, Vietnam had to spend a huge sum of dong, which meant that a huge sum of dong was pumped into circulation. In order to buy $10 billion in the first four months of the year, the State Bank had to spend VND210 trillion.

However, in order to control inflation and the money supply, it had to issue bonds to withdraw cash from circulation. Estimating the bond interest rate at 4 percent per annually, the treasury had to pay VND8.4 trillion on bond interest.

While foreign-invested enterprises can borrow money from foreign sources, Vietnamese businesses don’t intend to borrow money to organize production when they still cannot clear their stock. As a result, outstanding loans have been increasing very slowly.

According to the State Bank, outstanding loans of the whole banking system had grown by 0.93 percent by April 26.

Prior to that, in another report, the State Bank announced a credit growth rate of 0.62 percent by April 22, which means that credit grew by 0.31 percent after just four days (!)

Analysts say they can see problems in the banks’ lending. A big amount of capital has poured into government bonds. Of the VND81.154 trillion worth of government bonds issued by the State Treasury by the end of April, 85 percent were sold to credit institutions.

As such, banks mobilize capital from the public at six percent per annum on average and then use the capital to buy government bonds at 4.7-5.6 percent, which brings a loss.

The foreign exchange reserves have and will be increasing, but it’s unclear when the credit can recover.

TBKTSG