Is it better for firms to borrow VND or USD?

The USD/VND rate is expected to fluctuate a lot this year, making the decision between a VND or USD loan difficult for many import-export enterprises, even if VND lending rates are now substantially higher than USD lending rates.

The average lending rate in VND is 2.3–4.9% higher than the average lending rate in USD.

Quite a difference

According to figures from the State Bank of Vietnam, the average VND lending rate of domestic commercial banks for new and existing outstanding loans was 7.8-9.2 percent per year in January 2022. The average VND short-term loan rate for priority industries is around 4.3 percent per year, which is lower than the SBV's maximum short-term lending rate of 4.5 percent per year.

Meanwhile, domestic commercial banks' average USD lending rate for new and existing outstanding loans was 2.0-3.2 percent per year for short-term loans and 3.4-4.3 percent per year for medium and long-term loans.

As a result, the average lending rate in VND is 2.3–4.9% higher than the average lending rate in USD.

However, not all businesses are eligible for loans in USD. Because current regulations allow only commodity exporters and petroleum importers to borrow USD.

Advantages and drawbacks

Businesses may face exchange rate risk if they take out USD loans, according to Assoc. Prof. Dr. Pham The Anh. If the VND depreciates throughout the loan period, enterprises that do not have revenue in foreign currency will be exposed to the risk of VND depreciation while paying in foreign currency.

The exchange rate risk is inevitable, but not excessive, because central banks, such as the Fed and the ECB, will be tightening their monetary policies in the near future... However, despite rising inflation, rate hikes may be limit ed due to high production costs, which are impeding the economy's recovery, according to Assoc. Prof. Dr. Dr. Pham The Anh, who also noted that exchange rate risk is linked to Vietnam's trade balance. However, Vietnam's exports are expected to expand well in 2022, putting little pressure on the exchange rate. As a result, the Vietnamese dong may fall versus the US dollar this year, but not significantly. This is an advantageous situation for obtaining USD loans.

In Mr. Pham The Anh’s view, businesses should borrow USD if the VND loan rate is around 2-3 percent higher than the USD lending rate.

Assoc. Prof. Dr. Pham The Anh advises enterprises to use derivative products such as options and futures contracts to hedge against currency rate changes, but they should be aware of the fees associated with those contracts.