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Monday, November 30, 2020

A strange move initiated by the central bank

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On August 6, the State Bank of Vietnam (SBV) issued decisions No. 1349 and 1351 on cutting interest rates applicable to compulsory reserve deposited at the central bank by credit institutions, the Vietnam Development Bank, the Vietnam Bank for Social Policies and the State Treasury. That is the second time this year these rates have been lowered. What may be the implications behind?

In essence, the revision impacts banks and other credit institutions as income from the deposits they make is scheduled to decline, which also means a lower amount will be spent by the State budget to pay for the interest.

Many have opined that this move made by the central bank may be a multipurpose step and is not one that aims only to cut costs for the State. First, it may be because the move prompts banks to share the burden of the State budgets when the former’s profit will not be seriously affected in the immediate future. In the second quarter of this year, most banks recorded positive growth for their business results. Vietinbank even posted a pre-tax profit growth rate of 106% year-on-year.

However, the central bank’s goals, functions and first priorities are not for the sake of the balance of the State budget. They are instead to stabilize the national monetary market. Then is there any other implication of the SBV’s move? In its first interest rate revision, the SBV cut both the mobilization ceiling rates and lending rates applicable to priority sectors. In the context of the second wave of Covid-19, experts in the field are expecting another cut of key policy rates in the coming time to shore up enterprises.

Big leeway for lower rates

Latest statistics show that by July 28, the total banking system’s credit growth had reached 3.45% compared with the beginning of the year, way lower than the 7.48%-mark in the same period last year. That credit growth was lower than the mobilization growth (5.31%) created high liquidity among banks. Subsequently, the interest rates applicable to the Interbank market is currently low, about 0.3%/year for the one-week term.

Furthermore, according to some commercial banks the SBV last week bought almost US$1 billion. That means there was an equivalent amount of the dong, some VND23 trillion, was pumped into the banking system. Interbank interest rates are therefore forecast to remain low in the time to come. It is this reason that expectations are lofty for a new wave of lower mobilization rates conducted by the central bank.

However, inflation and the exchange rate are the two elements which must be taken into account by the central bank if it wishes to introduce any regulatory policy. Data collected till the end of June show that Vietnam’s trade surplus had reached US$6.5 billion, significantly higher than the US$2 billion-mark in the year-earlier period, which goes beyond all predictions. In other words, the anticipation that production facilities would be shifted by foreign manufacturers to Vietnam may be well-founded. If so, it cannot be ruled out that the trade balance will continue to be highly positive in the coming months and toward the year-end, the high season of shopping in American and European markets.

Another factor relates to the fact that the U.S. dollar is losing its value against other currencies around the world at an unprecedented rate. This tendency is forecast to sustain in the future as the United States remains faithful to her loosened monetary and fiscal policies. As a result, in Vietnam, the exchange rate may not be a worrisome problem in the rest of the year.

Albeit still unpredictable, inflation is certain to lose steam in the coming months as the foundation for inflation in end-2019 was already strong. Currently, Y-o-Y inflation till the end of July was 3.39% and average inflation was 4.07%. However, by the end of this year, inflation will be lower than the 4%-level set by the Government. It means the SBV is being given ample chances to cut policy rates deeper in the coming time when the mobilization ceiling rate is at 4.25%/year, remarkably higher than the current inflation rate.

Yet loan rates have not changed much

Lower mobilization rates will usher in lower lending rates. Yet, in reality, since early this year, although the central bank has cut twice the mobilization rates applicable to deposits with terms shorter than six months, from 4.75% to 4.25%, lending rates have hardly changed. That many banks reported positive business results in Q2 may be partly because their mobilization rates had been cut but their lending rates had not correspondingly.

Consequently, whether loan rates will come down depends totally on banks no matter whether the SBV further cuts mobilization rates.

Reality has shown that banks will cut their lending rates by a margin lower than the SBV’s cut and at a later time. In this case, the efficacy of the monetary policy formulated to support companies facing difficulties during Covid-19 may be lower than expected.

This scenario in real life means to give effective assistance to the corporate sector, the Government has to resort to more fiscal policy tools. Although a host of fiscal policy tools have been in use, they have failed to reach their intended targets because enterprises are confronted with difficulties in assessing their damages due to Covid-19. Companies across the board are looking forward to more effective policies which must be enacted in a faster time. One of them may involve the package which gives preferential loans which was once in place. This should become an urgent solution given the fact that the second attack by the corona virus will soon cut off the lifeline of many companies.

By Mai Khanh

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