SBV to withdraw VND20tril from circulation (VND Holders)
VNECONOMY updated: 19/02/2008
The State Bank of Vietnam (SBV) has announced it will issue VND20tril of promissory notes; the decision was made in the context of banks’ serious shortage of VND.
In an effort to withdraw money from circulation to curb inflation, the central bank has decided to issue VND20.3tril ($1.2bil) in compulsory promissory notes. 41 commercial banks will have to buy the compulsory promissory notes, while credit institutions operating in rural areas, including the Vietnam Bank for Agriculture and Rural Development, aren’t obligated.
The central bank fears that the consumer price index (CPI) is likely to increase sharply again after rising by 2.4% in January and thinks immediate action is necessary to prevent CPI from increasing too much further. This is SBV’s third move to curb inflation after stipulating a higher compulsory reserve ratio for bank deposits and setting higher basic interest rates.
The decision to force commercial banks to purchase compulsory promissory notes will be valid as of March 17, which means banks will have enough time to arrange capital to purchase the promissory notes under allocated proportions. The promissory notes will be due in March 2009, and banks will not be able to use the notes for recapitalization transactions.
The decision by the central bank has been worrying commercial banks, especially because they are seriously lacking VND capital. Banks are now facing many challenges: higher compulsory reserve makes their capital mobilization cost higher; they have to borrow money from the central bank at higher interest rates; and now they have to arrange big sums of capital to purchase promissory notes
Analysts say the biggest worry now is that the central bank’s decision will make interest rates escalate. Everyday sees new announcements of interest rate increases.
However, the central bank does not think the promissory note issuance will influence the capital supply and demand on the market, emphasizing that the monetary market will not see fluctuations as the promissory notes are short-term. An official from the State Bank said because the issuance is taking place after Tet, when commercial banks push up capital mobilization efforts, it will not be difficult for banks to arrange capital for purchasing promissory notes.
The central bank has stressed it will keep close watch over market performance to make timely decisions if something abnormal occurs.
The decision by the central bank to issue promissory notes is really bad news for the stock market. Foreign investors will find it harder to convert their foreign currencies into VND to make transactions.
Regarding the VND/US$ exchange rate, the State Bank of Vietnam has many times stressed that it aims to stabilize the value of the local currency. However, the dollar continues it devaluation, now at VND15,957/US$1.
Analysts say that in the near future, the monetary market will remain tense and the stock market will surely be influenced from the decision.
And they have every reason to think so. The central bank’s move has stirred up the monetary market. A source said that a bank gathered its staff urgently on February 15 to discuss measures to deal with the capital shortage, and the meeting lasted until 9 pm.
The source said one commercial bank has ordered its staff to stop disbursing loans, while other banks have asked their clients to wait before withdrawing money.
The source also said that low liquidity is now a big problem for many banks. At a recent transaction on the interbank market, VND100bil worth of capital was auctioned at an interest rate of 25%, to be paid by State-owned banks.
He said the VND capital shortage will last several more months, and banks may have to raise the deposit interest rate to 11%.
