Thursday, July 03, 2008

Interest rate race continues despite good liquidity

17:28' 02/07/2008 (GMT+7)

VietNamNet Bridge – Secretary General of the Vietnam Banking Association Duong Thu Huong affirmed that banks are raising deposit interest rates because of reasons other than low liquidity.

Interest rate race

What would you say about the successive interest rate increases?

Secretary General of the Vietnam Banking Association Duong Thu Huong, former Deputy Governor of the State Bank of Vietnam

I read banks’ reports for the first six months of the year and I can say that banks’ liquidity is good now. As liquidity is not a problem for banks anymore, I think there are three other reasons that are making deposit interest rates continue to rise.

First, bankers may think that they can lend money in the interbank market. Some banks still lack liquidity a little and they need to borrow capital in the market. I feel that some bankers hope they can lend at 21% in the market.

Second, some bankers thought that the State Bank would raise the basic interest rate in the context of high inflation, and they decided to raise interest rated as a move in advance. However, the State Bank has decided not to raise the basic interest rate.

Third, banks have to raise interest rates because other banks are doing that. In fact, many banks do not want to offer high interest rates to attract capital, but they have to do that to retain clients. You can see that once a bank announces interest rate increases, other banks would follow immediately.

Where’s the money?

Have the successive interest rate increases helped mobilise capital?

I feel that the capital flow to banks has not been as high as expected. Despite the high interest rates, the mobilised capital increased by several percent only in May and June

As such, a big volume of money still has not been attracted to banks. Where is the money, then?

It is now among people. Some people spend money to buy gold and foreign currencies to keep under their pillow. Some businesses, which have idle money, do not make bank deposits, but lend to each other. Some export companies which have foreign currencies from export deals do not sell foreign currencies to banks.

Why is the money still lying outside banks, when the deposit interest rates are at very high levels?

People tend to save up gold and foreign currencies because they try to protect their assets in the context of high inflation, lackluster stock market and gloomy real estate market. However, the government has been trying to tighten forex management, and I think that people will have confidence in VND.

Do you think that it is a wise move to store gold and foreign currencies?

People have the right to use their money in the way they want. However, it is clear that this is a big waste in using the society’s wealth.

Statistics show that Vietnam has imported 43 tonnes of gold and the majority of gold is lying among people, not in circulation, which means the money does not create new value.

Be smart investors

Have you read the articles which warned about the risks in injecting money in gold and securities?

Investors themselves decide where to inject money. However, try to be smart investors.

I think that Vietnamese people are too credulous. They rush to buy or sell something on any information they hear. Those investors who make investments on rumours will lose money.

What would you do now if you had a big sum of money?

I would convert the money into VND and make a bank deposit to enjoy the high interest rate.