Vietnam Cuts Dollar Deposit Interest Rate to Tackle FX Hoarding

Tuan Minh

10:16 18/12/2015

BizLIVE - The Vietnamese central bank has cut the interest rate on USD-denominated deposits by individual depositors to 0%, a few hours after the Fed lifted its policy rate.

Vietnam Cuts Dollar Deposit Interest Rate to Tackle FX Hoarding

An employee counts U.S. dollar bank-notes at a bank in Hanoi. (Photo: Reuters)

The State Bank of Vietnam (SBV), the country’s central bank, has slashed the interest rate on deposits in U.S. dollar to 0% from 0.25% for individual depositors, effective December 18, while the rate for corporate depositors will remain unchanged at 0%, which has been in place since September 28.
The move aligns with the monetary authority’s orientation to deal with the “dollarization” in the economy and switch from mobilization-lending relations to buying-selling relations.
The banking regulator in late September reduced the cap on interest rates for USD-denominated deposits by institutional clients (excluding credit institutions and foreign bank branches) to zero from the previous 0.25% per annum and imposed a ceiling of 0.25% for USD-denominated deposits by individuals.  
Deposit rate for USD in Vietnam used to reach as high as 6% per annum.
The SBV’s decision was made in the context the USD/VND rate has hit the ceiling of 21,547 dong a dollar since the start of this week while the free-market rate is touching 22,800 a dollar, as the Fed’s interest rate liftoff was looming and the Chinese yuan has been falling.  
The dong has weakened 5% from the start of this year after the SBV devalued the dong three times, with 1% each, and tripled the trading band of the forex rate to 3% so far this year.    
The SBV in September reiterated its commitment not to weakening the dong further throughout the year-end as well as in the first months of 2016, reasoning that the USD/VND rate has sufficient room to move against adverse developments at home and abroad.
SBV Deputy Governor Nguyen Thi Hong told local media on December 17 that the Fed’s interest rate increase by 0.25 percentage point will leave an insignificant impact on Vietnam because the foreign indirect investment in Vietnam has an inconsiderable share of foreign capital flows to/from Vietnam, and the Fed’s rate hike had been anticipated.
Le Tien Dong, deputy general director of Artex Securities, told BizLIVE that the SBV’s latest interest rate cut will make deposits in USD less attractive than those in VND. “It is reasonable to expect that the supply of USD will increase in the short term, thus helping reduce pressure on the forex rate, albeit slightly.”
The pressure on the USD/VND rate depends on other factors such as the strength of the domestic currency, the strengthening tendency of the greenback and the correlation with the Chinese yuan, Mr. Dong added.