Hopes Pinned on Credit Growth

The growth of 3.52 percent is much below the full-year growth target of 12-14 percent. Nguyen Van Binh, Governor of the State Bank of Vietnam (SBV), admitted that the credit growth is low. He attributed low growth to businesses in difficulty and low aggregate demand of the economy. “To push up economic growth, credit growth in 2014 must be about 10 percent,” he said. Interest rates will be kept low from now to the end of the year to support enterprises to access loans.

 

Not only low growth, more problems are envisaged if we look at breakdown figures. The credit growth was driven by increased lending in foreign currencies in the midst of sluggish Vietnamese dong borrowing. In the first half of 2014, dong credit growth was just over 2 percent while foreign currency-denominated loans increased 6 times. The substantial contribution of foreign currency loans sent the overall credit growth to 3.52 percent, on par with that in the same period in 2013.

 

Another question is the too-fast credit growth prior to the release of the credit report. Pham Xuan Hoe, Deputy Director of Monetary Policy Department, SBV, said, credit growth was 2.3 percent as of June 25. It meant that the credit growth was added 1.22 percent in the last five days of June, almost equal to the accumulated growth in the first five months. In another report released by the Ministry of Planning and Investment, as of June 20, dong credit growth was 0.68 percent while foreign currency credit growth was 10.51 percent. Meanwhile, the report released by the SBV at the review meeting said that dong credit growth was 2.17 percent and foreign currency growth was 12.03 percent as of end-June.

 

The economy showed no signs of rapid growth but why credit growth was so overheating? Whether the calculation was changed based on other factors or this was simply an act of “making the report nice-looking”?

 

According to the official data from the central bank, foreign currency credit saved dong credit. If dong loans rose 2.17 percent, foreign currency loans expanded 12.03 percent in the first six months. Earlier, the SBV delivered a message informing that banks will be allowed to increase foreign currency loans to boost credit growth to support economic development. Concerns about dollarization are shelved aside. The central bank said that dollarization is on the decline. Foreign currency deposits to total liquidity were 11.4 percent as of end-June, down from 12.4 percent at the end of 2012-2013. Total liquidity rose 7.29 percent in the six month period, consistent with the target of 16-18 percent set for the whole year.

 

Compared with the full-year target of 12-14 percent, the credit growth of 3.52 percent in the first six months was too humble. This meant that commercial banks will have to strive a lot to fulfil the room. It is a big challenge to push up loans while other safety indicators are ensured. Governor Binh stressed that banks will not lower their credit standards to boast loans because this may pose risks to the banking system.

 

Deposits kept going up while loans slowed. Banks pumped their abundant cash into bonds. However, the budget deficit was widened to 5.3 percent of GDP and government bonds issued also increased. “Monetary policy regulation and banking operation management will come under pressure and we cannot thus make light of inflation development," the central bank said in the report. For this reason, banks need to balance their capital to respond to emerging difficulties. The biggest problem is banks’ money is spent on bonds and treasury bills, just moving inside the banking system not going into production.

 

For the time being, the SBV is determined to keep interest rates stable through the end of this year. Credit growth will be boosted to support businesses and the economy. Nevertheless, the economy is still in difficulty while corporate bankruptcies show no sign of decline. Production investment decisions are now not enough to spur credit growth.