Vietnam: Refinancing A Domestic Loan With An Offshore Loan?
Vietnamese regulations and policy are certainly not in favor of using foreign loans to refinance existing domestic loan debts. However, the State Bank of Vietnam (SBV) could feasibly exercise its discretion to permit such loans if applicants made a compelling case. Prudent cross-border lenders will require Vietnam borrowers to disclose the purpose of a loan and seek clarification from the SBV in case of refinancing needs.
The SBV’s Circular 12/2014/TT-NHNN on the conditions for enterprises to borrow non-government guaranteed loans explicitly permits taking out foreign loans to restructure other foreign loans, so long as they do not increase the cost of borrowing. In other words, a new foreign loan at a lower interest rate to refinance another foreign loan should be permitted.
However, Circular 12 is silent on the use foreign loans to refinance domestic loans. A conservative reading would suggest that such refinancing is generally not permitted. Policy consideration support this view. Vietnam seeks to limit offshore loans (i) to control foreign debt, (ii) to prevent arbitrage and (iii) for other macro-economic reasons.
1. Foreign indebtedness control
The ultimate purpose of Circular 12 is to keep the country’s foreign indebtedness within permitted limits (annual limits approved by the Prime Minister). Therefore, the general thrust of the regulations is to permit offshore loans if they are necessary or benefit the economy (i.e., to the extent they are used to finance “real” business projects). An explicit exception to this “real purpose” rule is where new offshore loans would allow the borrower to reduce its offshore debt burden, thus easing pressure on Vietnam’s hard currency reserves as a whole. Refinancing of onshore loans with offshore loans could of course help reduce the borrower’s debt burden as well, but would result in increasing the country’s foreign indebtedness without any new production or business project.
2. Arbitrage
The SBV has generally been very uncomfortable with interest rate arbitrage, which would inevitably develop should refinancing of onshore loans be permitted. This would adversely interfere with the SBV’s monetary policy.
3. Macro-economic impact
If refinancing of domestic loans by way of foreign loans was permitted, the influx of foreign currency could destabilize Vietnamese Dong exchange and interest rates and spur inflation. It might also adversely affect local banks’ business and profitability.
We are not aware of any official or definitive pronouncement on this issue, and the SBV may exercise its discretion to issue a special approval. However, it would be necessary to prepare a strong case, including the economic rationale, the local lender’s support, and proof of revenue in foreign currency. The process can be started simply with an official letter of enquiry.
Remember that borrowers must apply to the SBV for registration of foreign loans having a term of more than one year. In events of default and acceleration, a change of repayment terms may have to be registered as well, before local banks can clear offshore remittances.
