Impressions of the Equilibrium

The State Bank of Vietnam (SBV) had a successful year in 2013. The SBV pursued an independent, transparent and proactive monetary policy. Interest rates decreased significantly; the gold market and exchange rate were stabilised; and rising foreign exchange reserves did not cause inflationary pressures. Credit supply did not soar although there were still complaints about over-tight credit policy. Liquidity easing prevented banks from triggering races to mobilise deposit capital as before. Gold fever disappeared as if it had never happened, although domestic bullion prices were still much higher than world rates.

 

The Open Market Operation (OMO) market operated rhythmically last year. This was a place where the central bank pumped and withdrew money, ensured liquidity for the commercial bank system and bought foreign currencies without causing strong effects on price index because of rational money supply. This aspect was more successful than in previous years.

 

Information transparency was also highly valued by the central bank. Monetary policies were informed more effectively and more transparently, ranging from outstanding credit growth, bad debt data, bank restructuring process, and foreign exchange reserves to SBV meetings. Information transparency boosted market confidence.

 

During the year, credits were overly muffled. Credit growth was just 7.51 percent in the year to early December. It was an inevitable consequence of high bad debts, economic difficulties, and shrinking business operations. This was the second straight year credit growth was low after many years of overheated growth of 30 - 40 percent. Overheating credit growth from 2007 to 2010 increased bad debts and caused high inflation. Low inflation in 2013, as low as 6.04 percent, was another success of tightened and flexible monetary policy.

 

Without doubt, the next success of the State Bank was gold auction. The central bank effectively regulated the gold market and restricted speculation to prevent negative impacts on exchange rates.

 

The SBV’s steps were very determined and systematic. Firstly, the central bank directed banks to settle all due gold deposits from July 2013 to reduce gold loan balances, thus gradually eliminating all gold-related risks and ending the "gold favour" in banking operations. Then, it intensified close inspection and monitoring over operations of credit institutions and gold traders. It hosted gold auctions to relieve the thirst for the precious metal on the market. It held the sole gold brand SJC and produced bullion to meet the market demand. Finally, it set up a new network for gold buying and selling, which was better organised and placed under closer management to facilitate citizens buying and selling gold.

 

Currently, the domestic gold price is still higher than the world price by VND4-4.4 million per tael, but the market is being operated smoothly. Gold fevers have been completely eliminated. Speculators could not manipulate the market to push up prices to seek margins. When the market is placed under the control of the central bank, pulling down gold prices by the increased supply is a simple task of the SBV.

 

Now, gold keepers felt really reassured about their assets and a transparent trading market. At macroeconomic level, the SBV can control gold price fluctuations if the bullion affects exchange rate, inflation and macroeconomic stability. Gold ingots is not allowed as a means of payment in transactions. In the coming time, the SBV can pin hopes on its policies to mobilise gold from the public to serve the country's economic development.

 

Exchange rate was under control because it was not pulled by gold rushes while being backed by exports and foreign exchange reserves. The forex market was basically stable and foreign currency liquidity improved. This increased the confidence in the local currency, VND, and reduced the favour of hard foreign currencies.

 

Bad debt was the centrepiece in the past time and bad debt settlement is critical to the bank restructuring process. The bad debt handling process in Vietnam engendered the sense of incompleteness and slowness even though banks reported rapid drops in nonperforming loans (NPLs). However, this result was largely produced by “technical effects". According to experience in other countries, to handle bad debts at troubled banks, they have to spend from 7 percent to 30 percent, even higher, from GDP and the money comes from the State Budget. Bad debts can be bought and sold completely but this requires a huge cost.

 

The Vietnam Asset Management Company (VAMC) was established to purchase debts at major banks. With their bad debts sold to VAMC, banks can increase liquidity and inject capital for the country’s economic development. Their debts sold to VAMC are no longer branded corporate bad debts. Those bad debts will be restructured in both maturity duration and interest rates.

 

However, VAMC’s scale cannot consume the huge debt volume in existence, but the company is expected to concentrate bad loans into a place to create a bad debt trading market for domestic and foreign investors.

 

Currently, the NPL ratio reported by banks is relatively low, only about 4.6 percent. However, based on monitoring criteria, this rate must be over 8 percent. Therefore, the task of bringing bad debts to 2-3 percent seems to be very heavy. This is not only the task of banks but of the whole society.

 

SBV Governor Nguyen Van Binh confirmed that the SBV has finished dealing with the nine weakest banks in the system. He said the weakest links in the system have been upgraded. The SBV said it has identified eight other weak credit institutions, including two commercial joint stock banks. This agency also guided the restructuring of three weak or law-violating joint venture banks. Expectedly, Vietnamese partners will divest from two of three joint venture banks. Some ineffective foreign bank branches will face the risk of licence revocation in the coming time.