Enterprises to Resume Borrowing Foreign Money

On 27th May, the State Bank of Vietnam (SBV) issued Circular 07/2016/TT-NHNN amending and supplementing some articles of Circular 24/2015/TT-NHNN regulating foreign money loans.

 

The recently issued Circular 07 allows credit institutions and branches of foreign banks licensed to conduct foreign exchange transactions to consider providing short-term loans in foreign currency to resident customers who have demand for domestic capital for production and trade through Vietnam’s border gates. Borrowers must have sufficient foreign currency from export revenues guaranteeing payment capability.

 

According to the rule, after getting the loans, borrowers must immediately sell the amount of foreign currency borrowed to the lending institutions under the spot forex trading method. For cases where borrowers get loans in foreign currency to make payments to partners under lawfully signed contracts, they do not need to sell foreign currencies to lenders. This regulation will remain in effect until 31^st December.

 

While production and business as well as socio-economic situation remain challenging, the lifting of the foreign currency credit ban opens up the promising prospect of wider capital access for enterprises. Although there is still the risk of exchange rate fluctuations to take into account, foreign currency credit remains a favourable capital with a much lower interest rate than VND loans, enabling exporters to cut costs and enhance competitiveness.

 

On the other hand, there are also some questions about this decision of SBV. For years, the central bank had insisted that foreign currency loans were only allowed for foreign investment and/or other mandatory requirements such as payment of petroleum imports.

 

True cases had showed that many businesses getting foreign currency loans not essentially because they were in need of foreign money. They needed capital in VND, but using the cover of foreign currency loans to buy exported materials; or borrowed USD to sell to banks to get VND in order to benefit from the interest gap.

 

SBV’s new regulation allows some exporters to get foreign currency loans, but essentially they are borrowing foreign money from their future selves, the amount would be collected from export contracts.

 

Businesses benefit from the difference in interest rates, foreign currency loan has much lower interest rates compared to borrowing in VND. Before, enterprises had taken dollar loans even without foreign currency revenues in order to exploit the interest rate gap. When exchange rate fluctuated, they rushed to buy foreign money to repay banks and put pressure on the exchange rate. This was the main reason behind SBV’s determination to sideline the USD from the credit system and brought the USD deposit rate to zero, which had been in effect for over the last six months. This policy was also a part of the overall policy against dollarization, including foreign currency credit restrictions.

 

However, the reopening of foreign currency credit also requires SBV to strengthen its supervision to prevent the old issue of getting loans to exploit interest gap from re-emerging.

 

According to SBV, this new policy aims to support the economy and businesses. For the first few months of 2016, economic growth has decreased on a year on year basis. At the same time, natural disasters such as drought in the South Central and Central Highlands regions, increasingly complicated drought and salinity intrusion in the Mekong Delta, and unusual incidents in central coastal provinces have been having negative impacts to aquaculture, fishing and tourism.

 

Moreover, this policy shows that SBV takes heed of businesses. Earlier, the Vietnam Association of Seafood Exporters and Processors (VASEP) sent dispatches to SBV proposing amendment that allowed seafood exporters to take short-term loans in foreign currency. According to VASEP, despite the purposes of macroeconomic stabilization and anti-dollarization, the prohibition of foreign currency loans threatened to shrink exporters’ competitiveness.