Vietnam tries to end gold mania, boost citizens' confidence in the dong

Vietnam's government is taking measures to strengthen the dong and discourage citizens from hoarding bullion to preserve wealth

PUBLISHED : Tuesday, 16 July, 2013, 12:00am
UPDATED : Tuesday, 16 July, 2013, 5:15am

The target of Vietnam's campaign to stabilise its currency is in the locked wardrobe of retired civil servant Vu Thi Huong: gold bars.

"It's been my habit for ages, buying gold whenever I can save up some money," said Huong, 57, who watches the financial news every day to monitor the price of the precious metal.

"With gold, I can save my fortune and later on have something valuable to pass down to my children and grandchildren."

Huong is among millions of Vietnamese who hold an estimated 300-400 tonnes of bullion to store their wealth. That amount - worth as much as US$19 billion at domestic prices and equal to Britain's official holdings - is a legacy of more than a century of war, revolution and economic turbulence.

The central bank wants to convert the hoard, much of it smuggled in, into dong deposits to strengthen the currency, which has slid 21 per cent against the US dollar in five years.

Private gold holdings "reflect both the Vietnamese cultural values as well as the lack of confidence in the dong," said Trinh Nguyen, a Hong Kong-based economist at HSBC. "High inflation and depreciation of the dong in the past have caused people to keep their savings in gold."

Demand for bullion prompts importers and smugglers to sell dong for US dollars to buy gold from abroad, depressing the local currency, Michael Kokalari and Hang Vu, analysts at Maybank Kim Eng Securities in Ho Chi Minh City, said this month.

To reduce contraband and persuade people to sell their bullion, the central bank made itself the sole importer and Saigon Jewelry the only legal producer of gold bars. To discourage people from holding the precious metal, it banned banks from paying interest on gold deposits from June 30. Banks now have to charge customers a fee for storing it.

"The gold policy really is to help stabilise the dong, because if people hold less gold, they don't try to move away from the dong," said Alan Pham, chief economist at VinaCapital in Ho Chi Minh City. "The side effect of that policy is increasing the amount of capital. That's like hitting two birds with one stone." Extensive use of gold and US dollars is hampering the central bank's ability to manage monetary policy, Nguyen said. "The holding of gold does not generate productive investment."

While the central bank devalued the dong last month for the first time since 2011 as the US dollar strengthened, it cut the interest-rate cap on US dollar deposits to discourage people from holding greenbacks and help boost foreign exchange reserves.

Other countries are also trying to wean citizens off bullion. India, the biggest gold consumer, has increased import duties, and a trade group called for suspension of sales of coins and bars to retail investors to help narrow a record current account deficit that pushed the rupee to a record low. During the Depression, US President F.D. Roosevelt banned citizens from hoarding gold.

Vietnam's central bank wanted to convince savers that it was more lucrative to hold assets other than gold, which meant boosting their confidence in the dong, said an official who asked not to be identified as the plans were still being discussed.

That argument has been helped in the past nine months by a 27 per cent slump in the world gold price, compared with a 1.8 per cent drop in the dong against the US dollar in the same period. Before the metal began to decline in October, its price had more than quadrupled in a decade, while the dong slid 27 per cent. Gold deposits at Vietnam's banks dropped 75 per cent as of the end of May compared with the end of last year, according to the government's website.

The central bank's bullion rules, combined with price swings in the gold market, were starting to affect people's attitude toward the metal, particularly in larger transactions such as property deals, said Nguyen Van Doanh, a real estate broker.

"In the past, gold prices were pretty stable. Everything with a large value - such as houses, land, cars - was priced in gold," Doanh said. "Given the changes in gold prices, together with the government restrictions in gold bar trading, it's no longer safe and convenient to use."

Nguyen Thuy Huong, 64, is marketing her five-storey house in downtown Hanoi for seven billion dong (HK$2.53 million). She bought the house seven years ago for 190 taels of gold.

"I can't price it in gold, since nobody would want to pay in gold these days," said Huong, pointing at the advertisement of her home in a local newspaper. "If someone wants to pay me in gold, I'm not going to take it either."