Rate Trend in 2013

Steep rate cuts administered by the State Bank of Vietnam (SBV) in 2012 are said to be the correct start of that process. However, market-driven interest rates are currently still at high levels. And, in 2013, the SBV, or the central bank, will necessarily keep market-driven interest rates on a stable downward trend.

 

For centuries, capital has served and will continue to serve as one of major driving forces for economic growth, although efficiency varies from country to country. In developed market economies, the interest rate - the price of the right to use capital - is used as a leading tool to regulate the economy.

 

Financial and monetary markets - the lifeblood of economy with a network of different capital channels, are responsible for mobilising and allocating financial resources for economic activities. Developments of this market always have an impact on all aspects of social and economic activities. Therefore, financial and monetary markets are subject to prudent management of the central bank and the government.

 

In the market economy, the developments of market interest rates are basic regulatory factors in the process of allocating capital to channels, as well as the circulation of capital flows in each channel. Economies where interest rates are pegged at high levels for a long time often tend toward capital concentration in commercial banks. And, consequently, banks usually play leading financing roles (short, medium and long terms) for businesses, while other capital channels, such as the stock market, will hardly have the opportunity to develop. This is the root of existing shortcomings in the Vietnamese banking system, where there is clear evidence of the imbalance of deposit terms and lending terms that usually leads to liquidity stress.

 

The restructuring of financial and banking systems is directed to return the role of short-term capital channel to the monetary market, and promote and sustain the development of the stock market as the medium and long-term capital channel. In that direction, bank credit (especially medium and long terms) will inexorably reduced and capital raised via the stock market (bond market and equity market) will gradually increase.

 

Banking system restructuring is being carried out aggressively. It is known that schemes of stock market restructuring and insurance market restructuring are also being submitted to competent authorities for approval and are expected to be deployed soon and completed in 2014-2015. So, the Vietnamese economy is expected to formulate and perfect a network of different channels which efficiently compete with each other to tap potential resources of the people for economic development and reduce burdens and pressures on banks which mostly play an exclusive role in financing businesses. Bank credit growth will thus probably decrease in comparison with previous years.

 

However, the above objectives can be achieved when, and only when, market interest rates are gradually lowered. If market interest rates are as high as now (lending rates popularly range from 12 per cent to 15 per cent per annum while inflation is expected to decrease to 7 - 8 per cent in 2012 and in 2013), the formation of a network of different channels perhaps make little sense. As mentioned above, market interest rates pegged at high levels for a long time will discourage capital flows from running into other channels but commercial banks. In that case, bank credit will continue to be the leading financing channel for enterprises and the "pie" of banks will thus continue to "inflate", while the financial and monetary market holds on to imbalances, especially term asymmetry. Businesses will then hardly be able to restructure capital sources towards a safe and healthy direction.

 

Currently, not only bank credit but most capital channels are facing difficulties, as evidenced by fundraising shrinkage, even deadlock, of businesses on the stock market in recent years. This reality is caused by high bad debt ratio in bank credit channel. Nevertheless, the root of the overall system of capital channels in the economy is the problematic congestion caused by pegged high market rates, even when inflation falls sharply. Thus, in the coming years, market interest rates should continue to be regulated towards a stable downward trend. And, there are also reasons for such expectations.

 

Vietnamese policy is consistent with economic restructuring towards harmonious and sustainable development. The first phase of restructuring aims at establishing a stable, solid macroeconomic foundation and does not pursue economic growth at all costs (according to the plan, GDP growth is expected at 5.5 per cent in 2013). So, pressures on social investment capital will also ease. Overall, a decreased pressure on capital demand will pave the way for lowering market interest rates.

De-dollarization of the economy is optimistic and efforts to manage the healthy development of the gold market will help stabilise the value of the dong - the local currency. When the huge amount of capital is awakened and utilised, the increased supply of capital also helps reduce market interest rates.

 

In 2013, the world economy is expected to continue slow growth, rather than a strong rebound. Some G20 economies may grow faster than the world rate. Hence, pressures from increased prices of global commodities on domestic inflation will probably not heavy.

 

Drastic restructuring of public investment and State-owned enterprises (SOEs) will help boost capital-use efficiency and lower incremental capital-output ratio (ICOR) of the economy. Furthermore, imbalances of industry structure need to be addressed and improved management and administration of essential commodity markets will help control inflation. Lowered expected inflation will facilitate market rate reduction.

 

The reshuffle of commercial banks is being implemented aggressively. If this process brings in good results, their financial and administrative capacity will increase and liquidity pressures will be minimised. In addition, this restructuring promotes the sustainable development of the stock market – the medium and long-term capital channel – and eases pressures on the bank credit channel. Commercial banks will therefore be able to lower deposit and lending rates. However, a number of administrative measures such as credit growth quotas are perhaps needed to regulate this process in the near term.

 

In summary, planning and regulating the process of economic restructuring towards sustainable development will facilitate the lowering of market interest rates to formulate and develop a financial - monetary market with short, medium and long-term channels which efficiently compete with each other to tap potential resources of the people for economic development. Thus, market interest rates should continue to be regulated towards a stable downward trend in 2013, given performance in 2012.