Vietnam devaluation may hurt banks: Moody’s

Feb 21, 2011 (LBO) – A devaluation of Vietnam’s currency by 9.0 percent may increase bank bad loans, especially where dollar loans were given to customers with local currency revenues and hurt capital, Moody’s, a rating agency has said. A weaker dong increases prices throughout the economy, with internationally traded goods, whether imported or exported adjusting upwards in local currency terms first.

“Higher costs will reduce cashflows for consumers and businesses and hence harm borrowers’ ability to service their liabilities,” Moody’s said in their weekly credit outlook report.

“The situation is worse in cases where borrowers have debt denominated in dollars but cashflows predominantly in dong.

“Although making loans to importers that do not have dollar-denominated income poses risks to both lenders and borrowers, many banks are still willing to offer dollar-denominated loans for importers.”

Liability Dollarization

Moody’s said firm have an incentive to borrow in US dollars because at around 7.0 to 9.0 percent per year the dollar lending rate is 10 to 12 percentage points lower than the dong rate of 18 to 20 percent.

Currency mis-match pressures were critical triggers for non-performing loans