VietNamNet Bridge – The monetary market is tensely competitive  at the beginning of the year because commercial banks have triggered a new interest rate war. Experts have warned that the escalating dollar interest rates could be perilous to managing the exchange rate.

 

In the first days of 2011, the dollar deposit interest rate continuously hit new records. SeABank and Vietbank raised their dollar deposit interest rate to a maximum of six percent. Just several days later, Vietbank once again raised its interest rate to 6.2 percent. However, Navibank  broke the record when it offered an interest rate of 6.24 percent per annum. However, in the latest move, Saigon Bank has announced an interest rate of 6.3 percent for 3 month term deposits.

 

VietBank is now offering a 6.2 percent per annum interest rate for one month term deposits that will be applied to deposits of $25,000 or more. In addition, the bank has also launched a special program to be applied to special clients, businesses with earnings in US dollars. Under the program, clients will be able to enjoy reductions of up to 100 percent of the transaction and international and domestic payment fees, or enjoy favorable lending interest rates. The reductions will depend on the volumes of deposits the clients make at the bank.

 

Explaining the decision to raise interest rates, a representative of a bank said that at the moment kieu hoi (overseas remittance) is arriving, therefore, it is necessary to raise interest rates in order to persuade the recipients of kieu hoi to deposit the dollars at banks.

 

“Meanwhile, all other banks have raised interest rates, therefore, we should also have to follow the move, or we will lose clients,” he added.

 

Meanwhile, Nguyen Duy Hung, General Director of Vietbank, said that the bank needs to offer higher interest rates in order to meet the demand for loans from businesses.

 

However, Le Dang Doanh, a well known economist, said that the demand for dollars at this moment is artificial. A lot of businesses borrow in dollars not to make payment for imports, but to convert loans into Vietnam dong. It is because the gap between the dong and the dollar interest rates is so big, 10 percent per annum, that businesses find it more profitable to borrow dollars than dong.

 

“If the dollar interest rate race does not end soon, this would cause immeasurable consequences,” Doanh has warned.

 

Sharing the same view with Doanh, Dr Le Tham Duong from the HCM City Banking University, said that if the situation cannot be improved, it may happen that people will rush to purchase dollars and make deposits for profit.

 

“If so, the interest rate will pressure the exchange rate, thus negatively affecting the import-export activities and the GDP index,” Duong said

 

He went on to say that the overly high dollar interest rates would prompt overseas citizens to remit dollars to people in Vietnam, who will deposit money to get a profit.

 

Meanwhile, Dr Nguyen Van Thuan from the HCM City Open University, has warned that the overly high dollar interest rates will cause the government’s plans to ease the dong interest rate to fail.

 

He has warned that the continued dollar interest rate escalation could be a big threat, because businesses cannot anticipate the exchange rate fluctuations.

 

“Businesses, which borrow dollars now, will sell dollars at the quoted exchange rates, but later, when they buy dollars to pay debts, they will have to buy at the exchange rates on the black market. Especially, when businesses rush to buy dollar at the same time, this could lead to high demand and dollar price increases,” he said.

 

Nevertheless, an official from the State Bank of Vietnam said that the current dollar interest rates are not high enough to cause worry. He said that commercial banks have the right to use their capital flexibly.

 

Source: VnExpress