Interest Rates Retained to Support Economic Recovery

In 2013, the SBV cut 2 percent of regulatory interest rates, 3 percent of short-term lending rate applied to priority sectors, and 1 percent of interest rates applicable to termed deposits. The central bank also allowed credit institutions to set their interest rates for deposits bearing the maturity of six months or longer. As a result, interest rates dropped by 2-5 percent versus 2012. Interest rates in 2014 were considered the lowest in nearly a decade. Interest rates fell 1.5-2 percentage points in comparison with the end of 2013, with deposit rates falling by 1.5 - 2 percent per annum and lending rates declining by 2 percent, bringing interest rates to the lowest level since 2005-2006. Interest rates on existing loans were further slashed by credit institutions. Loans bearing an interest rate of over 13 percent per annum accounted for nearly 15 percent of total loans.

 

At a press conference on banking operations in the first six months and activities to be deployed by the SBV in the last six months of 2015, SBV Deputy Governor Nguyen Thi Hong admitted the recent upturn of deposit rates.

 

She said that this upward trend was not popular. Some lenders mainly increased short-term interest rates to popular rates imposed by other banks. Interest rates were further slashed 0.2 - 0.5 percent per annum in the first six months in comparison with the end of 2014. Particularly, deposit rates which slid 0.2-0.5 percent per annum, primarily applicable to deposits of over six months, facilitated lenders to cut interest rates on medium and long-term loans. Lending rates fell 0.2-0.3 percent to commonly 6-9 percent per annum applicable to short-term loans and 9-11 percent on medium and long-term loans.

 

This year, the monetary market witnessed new signals from previous years. Credit growth in the first six months of 2015 was higher than the same periods from 2012 to 2014. As of June 15, 2015, credits for the economy grew 5.78 percent from the end of 2014 and 18.98 percent from a year earlier. In particular, rural development and agriculture were prioritised by banks. Outstanding loans as of June 30, 2015 expanded 7.71 percent from December 31, 2014. By the end of March 2015, loans for prioritised fields improved, specifically credits for exporters, small and medium-sized enterprises (SMEs), development-prioritised industries, and high-tech applying enterprises grew 3.9 percent, 1.88 percent, 0.2 percent, and 24.02 percent, respectively.

 

Credit for the real estate sector expanded 10.89 percent as of May 2015, accounting for 8.3 percent of total loans.

 

According SBV, property credit primarily went into housing construction. Deputy Governor Hong reaffirmed the central bank's view on potentially risky areas while paying special attention for five fields of priority and SMEs. From now until the end of 2015, credit growth will be boosted by loans for production and business fields.

 

With clear signals of economic recovery, interest rates tend to rise, particularly towards the end of this year. Deputy Governor Hong cited Directive 01 of the SBV Governor on interest rate stability management issued at the start of the year. According to the SBV, the current macroeconomic development is positive, featured by a 6.3 percent GDP growth and inflation curbed at a low level. Hong said the National Advisory Council for Financial and Monetary Policies anticipated inflation to climb 3 - 3.5 percent this year.

 

Thus, interest rates are expected to be at the current level. Given the recent credit growth, the SBV will flexibly inject or withdraw money in the system to enable banks to boost credit growth to meet capital needs of the market.

 

Deputy Governor Hong affirmed that interest rates will be at the current level in the last six months of 2015. Interest rates imposed by credit institutions will be based on the market supply and demand and the central bank is ready to refinance to support the liquidity and credit growth. The SBV must flexibly regulate interest rates to fit the market demand and the exchange rate. Recently, interbank interest rates fell to 3 - 3.5 percent per annum on one-month loans, a relatively low and stable rate.

 

The SBV applied many active and flexible monetary policy tools to control inflation, stabilise the macro economy, support economic growth at a reasonable rate, and ensure banks' liquidity.

 

Vietnam ran a trade deficit of US$3.8 million in the first six months of 2015, equivalent to 4.8 percent of exports. Particularly, the foreign direct investment (FDI) sector enjoyed a trade surplus of US$6.07 billion, while the domestic sector incurred a trade deficit of US$9.83 billion. Growing trade deficit was attributed to slowing exports and rising imports plus disadvantageous factors on the world market and the domestic economic recovery which gave rise to an increase in imports. High trade gap has placed pressures on exchange rate, a key reason for the devaluation of local dong in May - the second in the year. The depreciation of local currency will cause import prices to go up and affect the public confidence in dong to a certain extent.

 

The rise in exchange rate will also affect the current interest rate and will influence inflation as well, which in turn will put pressures on interest rates in the market. Moreover, the dilated disparity in dollar and dong interest rates is beneficial to dong. If the exchange rate increases sharply, depositors will tend to withdraw dong and exchange into US dollar to deposit at banks. Thus, when input interest climbs, output interest rates will be hiked as banks must consider revising up dong interest rates to retain customers.

 

Capital flows into real estate and stock markets continued to be tightly controlled.

 

After two months directing lenders to fund the real estate sector, the Governmental Resolution of the regular cabinet meeting for June 2015 stated “Close control over loans for risk fields” and specifically named real estate and long capital-recovering projects. Huge real estate inventories trapped in thousands of real estate projects across the country have not been resolved. Therefore, there are no signs for the return of the "bubble" of the real estate market. The growth of the real estate market largely depends on State economic management policies, including credit policies. The reasonable regulation will restrain the real estate market from overheating growth and avoid the collapse of financial and monetary markets.

 

Deposit and lending interest rates are expected to be stable in the banking system from now till the end of 2015 and the SBV will impose a flexible regulation, combine many monetary policy instruments, and seek close coordination of ministries and branches.