An updated report from the central bank shows that total mobilization at banks by May 19 was expected to increase by 0.56% month-on-month. Of which, mobilization in Vietnam dong rose 1.32% while mobilization in dollars declined by 1.96%, the first fall in dollar deposits since early this year.

Meanwhile, the amount of dollars sold directly to banks has increased sharply, indicating that the people now do not want to keep dollars as assets. The central bank reported that the amount of dollars sold to banks has exceeded demand and the central bank’s net buying from banks has amounted to US$877 million since the beginning of this year.

Shift to Vietnam dong

The shift among the widespread public from the greenback to the local currency has been triggered by numerous policies of the State Bank of Vietnam this year.

On April 9, the central bank forced all commercial banks to lower the dollar deposit rate to a maximum 3% per year for individuals, much lower than the popular rate of 6% at that time. And in late May, another similar move was taken by the central bank, slashing the cap to 2% for all dollar deposits by individuals and 0.5% for institutions.

In addition, the central bank also increased reserve requirements for dollar deposits – the second time this year – to 7% now, and forced State-owned corporations to sell all dollars to banks.

Do Lam Dien, deputy director of corporate banking of Maritime Bank, told Daily that dollars at this time can bring a maximum interest sum of 2% for depositors, but if they change the greenback to Vietnam dong, they would earn at least 14%. If the forex rate is stable from now to the end of the year as expected, keeping Vietnam dong will generate much bigger benefit than the dollar, he said.

“Therefore, there has been a trend of the people switching from holding assets in dollars to Vietnam dong, making the amount of dollars sold to banks to swell strongly and resulting in dwindling dollar deposits,” he added.

Nguyen Thi Kim Xuyen, deputy general director of DongA Commercial Bank, observed that raising the reserve requirement in dollars did not push up the capital cost for borrowers because the deposit rate cap was cut to 2%. However, it will be harder for enterprises to access dollar capital at banks as lenders have to choose good customers at a time mobilized funds in dollars became smaller, she added.

Dien from Maritime Bank said the central bank also wanted banks to restrict dollar loans especially for importing non-essential goods which can widen the trade gap this year, so the central bank has issued Circular 07 to realize this goal.

According to the central bank, outstanding loans by May 19 increased just 0.01% month-on-month. Of which, the credit growth in Vietnam dong fell by 0.64% but that in foreign currencies still rose by 2.19%. In the first five months of the year, the credit growth in dollars was nearly 19% compared to late 2010.

Dollar scarcity forecasted

However, in considering the increasing trade deficit, experts are worried that the pressure will pile up on the local currency in the future.

The deputy general director of a bank said that at this time exporters borrow the dollar to enjoy a low interest rate and then sell it for Vietnam dong, and will repay their dollar debts when their revenues in foreign currencies come in the future. That will lead to a falling amount of dollars sold to bank in the next few months, while the demand for dollars at that time will be unchanged, exerting pressure on the local currency, he said.

In addition, Vietnam basically lacks dollars to offset its trade deficit so if the trade gap widens further in the coming months, the pressure on Vietnam dong will increase also, he added.

A report by Viet Dragon Securities Co. said although the foreign exchange market is stable now, the agreeable situation looks short-lived as the pressure on the local currency is still high due to the heavy trade deficit.

May trade deficit was US$1.7 billion and the trade gap in the first five months of the year accounted for up to 19% of total export revenue.

“If the recent trend continues in the rest of the year, it will affect Vietnam’s balance of payments and then the public sentiment,” Viet Dragon said.

Standard Chartered Bank in a report in late May said they expected another depreciation on dong in the third quarter this year and the forex rate is expected at around VND21,800 by the year’s end compared to VND20,600 now.