Credit Growth Revamps

According to the Economic Credit Department, the State Bank of Vietnam (SBV), credit is still strongly flowing into the priority areas. Specifically, outstanding agricultural and rural development loans exceeded VND811 trillion, up 9 percent from the end of 2014. Export credit climbed nearly 5 percent; loans for high-tech applications jumped over 29 percent; loans for supporting industries looked up 3.2 percent; and loans for small and medium-sized enterprises (SMEs) rose 4 percent over the end of 2014.

 

While credit growth was strong, deposit growth was fairly stable. Outstanding deposits at credit institutions as of August 20 were estimated to advance 7.26 percent, compared with the growth of 7.92 percent in the same period of 2014. Dong deposit and lending rates were relatively stable, ranging between 4 percent and 7 percent per annum. Interest rates on US dollar deposits usually stood at the upper limit of regulatory rates imposed by the SBV.

 

Credit structure shows that capital flows are running as expected by the Government. Credit demand has risen as the economic recovery results in higher investment demands. Mr Nguyen Tien Dong, Director of Economic Credit Department, said the credit growth target of 16 - 17 percent this year is within reach.

 

Good credit growth plus fluctuations on the foreign exchange market aroused some commercial banks to raise deposit rates by 0.1-0.3 percent in early September. Three-month term deposits now carry an interest rate of 5.5 percent per annum from 5.1-5.2 percent earlier this year. Rates on 13-month deposits also climbed to 7.3 percent per annum from less than 7 percent earlier.

 

As usual, the fourth quarter is the most vibrant time of the year when companies have higher payment demands. Credit growth usually jumps most in the year during this period. Interest rates tend to go up and the trend will be clearer in October. Although big commercial banks still hold interest rates unchanged and only small lenders pushed up deposit rates to respond to the market demand, a new level of interest rates will be established if the SBV lacks timely actions.

 

Apart from optimistic economic factors, looking at interest rate developments and capital flow charts, we can see that rising coupon yields of government bonds are an important pressure on interest rates. The abundant supply of high-yield government bonds (carrying a coupon rate of 5 percent) with almost zero risks is drawing more money on the market. The money supply is thus further narrowed.

 

The Vietnam Bond Market Association said the volume of government bonds issued to the market in the first eight months of 2015 met only 37.7 percent of the full-year target. The State Treasury issued VND94,258 billion worth of bonds and VND21,130 billion of promissory notes in the first eight months of 2015.

 

Resolution 78/2014/QH dated November 10, 2014 of the National Assembly on State budget estimations for 2015 stipulates, "From 2015, government bonds will have a maturity term of 5 years or higher. No short-term debentures will be issued to offset budget deficit or roll over debts." This resolution has reduced the successfulness of government bond tends while increasing the demand for short-term bills.

 

Unsuccessful tenders have forced the State Treasury to raise coupon rates if it wants to sell more bonds. Successful bid rate in August was 6.4 percent per annum (5-year maturity term) and 7.65 percent per annum (15-year maturity term). No 10-year bonds were sold. These rates explain why interest rates in Vietnam are always high.

 

Apart from the magnet from government bonds, according to experts, commercial banks also have to shoulder many programmes that the State Budget should take on like the social housing package of VND30 trillion or fishing boat loans for fishermen. These have pushed up banks’ capital costs.