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Who will benefit from the weaker dong?

Update: January, 19/2015 - 08:39

On January 7 the inter-bank exchange rate was adjusted by 1 per cent following the central bank's action, reducing the daily reference rate from VND21,246 to VND21,458 to the dollar. — Photo laodong

Compiled by Thien Ly

A new year has come, bringing with it some good news for exporters : the State Bank of Viet Nam has decided to depreciate the dong by 1 per cent.

On January 7 the inter-bank exchange rate was adjusted by 1 per cent following the central bank's action, reducing the daily reference rate from VND21,246 to VND21,458 to the dollar.

Many banks have since changed their exchange rates.

Eximbank adjusted it to VND21,430-21,480 on the same afternoon, weaker by VND27 from the previous day.

Vietcombank fixed it at VND21,450-21,515 VND110 weaker than the previous day and around VND35 more than other banks' rates.

On the HCM City free market, the greenback has surged to VND21,560-21,630.

The central bank has justified its decision to tweak the rate by saying it would help steady the market in the face of volatility at home and abroad.

Analysts said the move was also aimed at encouraging exports.

The country's exports rose to US$150 billion last year turning the balance of trade into a $2 billion surplus.

But the analysts said that the rate adjustment would mainly benefit foreign-owned firms since they are the most successful exporters.

Domestic exporters are mainly in the agricultural and seafood sectors, but with the economic situation still to ease, their exports remain modest.

Besides, some of their products are processed mainly using imports whose prices will now rise as the dong fetches fewer dollars.

Some economists have warned that the country would also have to suffer from higher costs when it repays foreign debts.

For domestic consumers, a costlier dollar would cause the prices of many goods to rise since they are imported or use imported raw materials.

The analysts warned that businesses have to be cautious in hiking prices because of the intense competition in the market and the continuing sluggish consumer demand.

However, those selling goods produced domestically will be beneficiaries.

Central bank boost

The central bank's recent Circular No.36/2014/TT-NHNN allows banks to own shares in a maximum of two other credit organisations with the holding in each not exceeding 5 per cent.

Exceptions are allowed only when a bank buys shares to support the restructure of a weak bank and has the expressed approval of the State Bank of Viet Nam.

The central bank's new regulations are aimed at limiting cross-ownership of credit organisations, including banks, which is considered one of the most pressing problems for the Vietnamese banking system and allowed manipulation by some banks in recent times.

The circular is also expected to help accelerate the second phase of the banking sector's restructuring process. According to a restructuring plan, by 2017 the number of banks in the country would be reduced to just 20 from nearly 40 now, many of them becoming large, highly competitive and of international standards.

Now many banks own more than 5 per cent of other banks while holding stakes in four or five other credit organisations is not uncommon.

Vietcombank, for instance, owns shares in five credit organisations – MB, OCB, Eximbank, Saigonbank, and Cement Finance Joint Stock Company — according to Dau Tu (Investment) newspaper.

Its stakes in these credit organisations mostly exceeded 5 per cent.

Similarly, Techcombank has a 10 per cent stake in Viet Nam Chemical Finance JSC while Maritime Bank has a 9.9 per cent stake in MB, 10.2 per cent in MDB and 11 per cent in Textile and Garment Finance JSC.

To bring their ownership levels within the prescribed norms, most of the banks have opted to take the M&A (mergers and acquisitions) route and are ready with their plans.

Vietcombank, for instance, recently announced plans to acquire Saigonbank in which its holding now is 8.2 per cent.

BIDV is set to merge with a small, weak bank, while Vietinbank plans to buy out PGBank.

A central bank source also revealed that approval has been given in principle for the mergers of Southern Bank with Sacombank and Mekong Bank with Maritime Bank.

Analysts have said that while tightening cross-ownership norms is essential, the banks need to be given a clear and unambiguous roadmap for acquiring or selling stakes.

Bond issuance

At a recent meeting the Ministry of Finance revealed that it would have to raise an estimated VND85 trillion (over US$4 billion) in 2015 through issuance of government bonds.

But ministry insiders are apprehensive since they foresee several hurdles to implementing the scheme.

Banks have for years been the biggest buyers of government bonds, holding 80 per cent of all bonds, but may have to ease off now due to the looming possibility of strong credit growth.

After dawdling for the best part of last year, banks' credit growth rose sharply in the latter part and is expected to finish 2014 at an estimated 12-14 per cent.

The very low levels of inflation now – there has even been deflation in the last month or two – and plunging interest rates are expected to allow banks to substantially increase lending in the coming time.

In this context, it will have to be seen how much money they have to buy government bonds.

Another obstacle facing the finance ministry's fund-raising plan is that bond investors have become more cautious because of new regulations in the State Bank of Viet Nam's Circular 36/2014 and the National Assembly's Resolution 78/2014/ND-CP on the 2015 budget estimates.

The Government can only issue bonds with maturities of five years or longer, cannot take short-term loans to bridge budget deficits and have to reduce borrowing for repaying old debts.

The finance ministry is therefore studying the possibility of issuing dollar-denominated bonds worth $1 billion for 10 years on the international market if it can find demand there.

The ministry's plan follows the issuance of $1 billion worth of international bonds last year.

Besides raising funds, the ministry will also tighten the purse strings for infrastructure works, giving priority to projects that have already been completed or will be completed this year. — VNS

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