Roadmap Needed to Reduce "Shocks"

Vietnam’s State Bank Governor Nguyen Van Giau has recently held a press conference on credit growth, interest rate, exchange rate and other issues, especially those related to impacts of interest rate support programme.

 

To curb economic slowdown, the Vietnamese Government has adopted policies to boost credit. What is the suitable credit growth to avoid inflation?
To avert economic slowdown, Vietnam expected to cap credit growth at 21 - 23 per cent in 2009 but the Government demanded the growth of 25 per cent. However, after weighing on impacts of economic slowdown and longer turnover of credits, the State Bank of Vietnam (SBV) proposed the Government to cap credit growth at 30 per cent in 2009. This is a suitable rate when we fight against economic recession.

 

In the first five months of 2009, credit growth was up 14.01 per cent from the end of 2008 and was forecast to rise 17 per cent by the end of June. However, the rate will slow down in the last months of the year.

 

The nature of credit growth this year is different from that in 2007. In 2007, SBV had to inject a large amount of cash to buy foreign currencies from foreign investors and this caused a surge in money supply. In 2009, the central bank still closely manages money supply although the country is struggling against economic slump. By the end of May, money supply was equal to 43 per cent of the full year target approved by the central government for 2009.

 

Arguably, to fend off economic slowdown, stabilise macro economy and ensure social security, the monetary policy management of SBV was loosened but with more prudence, control and monitoring.

 

Inflation will be a hard nut to crack in Vietnam as well as the rest of the world. To ward off economic recession, many nations are loosening their monetary policies and fiscal policies and changing commercial policies. Additionally, oil prices will leave strong impacts on inflation rates. Therefore, we need to closely track global movements to adopt suitable adjustments.

 

Vietnam is struggling to prevent economic slowdown. However, all fiscal, monetary, trading, importing, exporting, market and price management policies must be carefully exercised and investments from central budgets and from banks must be channelled into right places. Effectively implementing these policies of the Government, Vietnam will push back economic slowdown and prevent re-inflation.

 

With such a high proposed credit growth, which measures has the central bank adopted to control cash flows and to check the flowing into risky investment channels like real estate and stock markets?
At present, credit institutions lend based on the Decision 1627/2001/QD-NHNN which has been effective since 2001. This is a standard credit regulation complied with international practices and recognised by international institutions. According to this decision, credit institutions are liable to sell-control its credit activities to comply with the law and regulations of the SBV. The interest rate support programme has caused strong influences on outstanding loan growth. However, credit institutions are also allowed to implement negotiable interest rates and issue credit cards to boost lending.

 

Regarding securities-based lending, according to the Decision 03/2008/QD-NHNN, none was found guilty. Several enterprises borrowed money to invest in the stock market but banks could not stop them if they satisfied requirements. There should be examinations into such cases. The SBV will strictly punish violators.

By the end of May, outstanding loans for real estate approximated VND151 trillion, a rise of 9 per cent from the start of the year, outstanding loans for stock investment neared VND7.2 trillion, up 4 per cent, and outstanding consumer lending was VND85 trillion, up 11.6 per cent. These rates were still lower than the outstanding loan growth rate of the economy, at 14 per cent.

 

By the end of April, bad debt ratio was 2.62 per cent on total outstanding loans, a slight rise over the rate of 2.17 per cent at the start of the year. So far, we have not seen any signs of turmoil. However, from June 10, the SBV conducted an examination in three fields: interest rate support programme, system safety and state management over foreign exchange. Initially, inspectors will check in 32 provinces and cities. Recently, the SBV demanded credit institutions to self-examine the results of lending based on negotiable interest rate, especially consumer lending.

 

Could you explain the effectiveness of the interest rate support-based stimulus package and its “side effects”? Do you know when interest rate support policy will be completed, and whether product prices will soar and cause higher inflation?
Arguably, the interest rate support policy is unprecedented in both Vietnam and the world. I reconfirm that this policy is absolutely right and reflects the humanity and responsibility of the Party and the Government to the nation.

 

In late December 2008, the Government issued the Resolution 30 in an attempt to curb economic slowdown. But, the sentiment of producers and dealers is now weakening. Thus, the Government chose a policy with the highest spill-over effect, that is, the interest rate support policy. According to expectations of policymakers, enterprises must economise to the best and the interest rate support policy will help create competitive prices. And, the Prime Minister assigned the SBV to implement this policy. The banking system is only the intermediary to transfer the Government’s supports to enterprises. As we know that this is a right policy of the Party and the Government, we never demur to work extra hours, print materials, organise conferences and meetings and explain the policy to enterprises and people. As a result, the policy is generating sweet fruits. We will supplement new contents when we implement the policy.

 

When we outlined plans to carry out the Decision 131, interest rate-subsidised outstanding loans have reached VND490 trillion. With a growth of 21-23 per cent, the figure will be VND583 trillion. This means that it impacts outstanding loans, not credit growth. To date, the disbursement in accordance with the Decision 131 reached VND320 trillion and the value is expected to reach VND480 trillion by the end of this year.

 

When the economy improves, the Government issued the Decision 443. Outstanding loans in line with this decision will be the new ones. Based on calculations for beneficiaries, the value to this effect is around VND70 trillion. From April 1 to the end of May, as much as VND14 trillion was disbursed, accounting for 21 per cent of the total.

 

The subsidy of 4 percent of interest rate per annum is significant support. In some localities, this support makes up 3 per cent of cost price. Thus, when the programme ends, enterprises will be affected. I support a roadmap to reduce “shocks” for enterprises. The SBV will report specific measures like tax cuts to the Government to deal with this.

 

At present, many enterprises complain that they have to pay a surcharge when they borrow foreign currencies from banks. What do you say about this?
According to the latest resolution of the Government in 2009, Vietnam will keep inflation growth at 6-7 per cent and trade deficit growth at 20 per cent out of export turnover, or US$10 billion. Clearly, these goals have created higher pressure on the demand for foreign currencies. We can settle the demand by inward remittances and foreign investment sources.

 

However, to be honest, the interest rate support programme makes enterprises shun foreign currency lending because, with interest rate subsidy, the real interest rate in VND loans is only 5-6 per cent per annum while the interest rate in foreign currencies was then 4.5-5.4 per cent per annum at State-owned commercial banks and 6-7.5 per cent at commercial joint stock banks. Therefore, at a recent banking meeting, leaders of State-owned commercial banks pledged to reduce the interest rate in foreign currency loans to 3 per cent or lower from June 1 to encourage enterprises to borrow foreign currencies. Clearly, it is the fault of enterprises if they do not borrow foreign currencies.

 

According to the Ordinance 38 of the National Assembly and the Decree 49, general directors of banks are allowed to set fee rates on the basis of publicity. The SBV will impose strict punishments on violators.