2011 - Testing Year for Monetary Policy

Speaking at the press briefing, SBV Governor Nguyen Van Giau said the money supply for the Tet - Vietnamese traditional lunar New Year - was VND130 trillion and the SBV had withdrawn more than VND100 trillion.

 

He added 2011 will be a testing year for fiscal monetary policies given macroeconomic uncertainties. Following the Government’s Resolution 11, which puts emphasis on reducing aggregate demand and ‘belt-tightening’ fiscal advocacy, monetary policy must also follow suit.

 

Accordingly, the central tasks of the State Bank this year are to help curb inflation, stabilise exchange rate and timely supply enough of capital for essential production and maintain the system liquidity.

 

The governor said the central bank had created many money supply scenarios for the Tet holidays and finally chosen the “deepest” one. Specifically, to deal with surging volume of money pumped for the lunar New Year 2011 in comparison with that in 2010, the State Bank decided to increase money supply and transfer it to needing areas.

 

And, “our first victory is to successfully withdraw money supplied for the Tet," the governor said.

 

The second task is to stabilise exchange rate. To do this, the SBV has taken two important steps. Firstly, it adjusts the officially quoted exchange rate close to the market rate. The move has satisfied both the market demand and preserved forex reserves which are shrinking. Secondly, it carries out exchange surrender with all State-owned economic groups and corporations.

 

The governor said at present all subsidiaries of State-owned economic groups and corporations are selling foreign currencies to banks and the balance of foreign currencies is growing up at banks every day. Thus, pressures of exchange rates significantly alleviated. At 1:30 p.m. on March 1, the USD/VND exchange rate is 21,600 on free market in Hanoi and a few of deals were reached.

 

The third task is to curb inflation. To realise this goal, the State Bank has cut 300 percentage points of credit growth formerly set for 2011 by the Government to 20 percent from 23 percent.

 

He noted that non-production credit (including real estate, securities and consumer loans) accounted for 17-18 percent of total bank loans at the end of 2010. The growth for this sort of lending rose about 3.27 percent in the first two months of 2011 but this figure was already included abstract number happened following the exchange rate adjustment on February 11, 2011.

 

This meant that when the exchange rate was revised up 7.18 percent, credit institutions converted foreign currencies to Vietnamese dong with the new rate and this made a rise in credit in some sections, which leads to an increase in the entire credit system. These sections accounted for some 1.5 percent of overall credit growth. According to the SBV, it is necessary to slow down credit growth from the start of the year to reach the target.

 

At this press conference, the governor highlighted three pressing matters: high interest rate, weak liquidity at the time of monetary tightening applied by the SBV, and the regulation of gold trading.

 

As regards interest rate, after there is information that some banks have breached the 14 percent limit deposit rate fixed by the SBV, the governor said the SBV will impose strict sanctions on any violators. After the Law on State Bank and the Law on Credit Institutions took effect from January 1, 2011, the State Bank has more instruments than it needs to deal with.

 

With respect to liquidity, he said this is a price we have to pay for when we tune up policies. Many people usually complain that the set of interest rates fixed by the SBV do not directly impact policies but all monetary regulatory policies must follow up broader objectives of the Government. The SBV is determined to defend the use of drastic measures to reduce aggregate demand and regulate market-affecting interest rates for this purpose. When we have this objective, we of course have to raise key interest rates.

 

“This revision does not impact the market very much and cause banks to suffer liquidity shortage because banks only borrowed just VND1,000 billion of refinanced capital as provided in the monthly report in January 2011.

 

In addition, concerning open market operation (OMO) transactions, the SBV will pump and withdraw money as usual. With a growth limit of 20 percent, it cannot “pump” as much as it wants although it has the whole power with money supply and valuable papers the open market.

 

Regarding gold management, the governor said Vietnam previously defined gold as a commodity and allowed normal circulation as other commodities but many negative activities involving the bullion like speculation and means of payment appeared. In the past two years, the Government assigned the SBV to create a gold management decree in lieu of the Decree 174. At present, the draft is being discussed by concerned ministries before being submitted to the Government.

 

According to the draft decree, bullion trading will be banned on free market.