return icon Vietnamnet.vn

Averting inflation due to excess cash in the system

As many companies cope with debts caused by the economic fallout due to the pandemic, they are unable to take loans for maintaining or expanding their business lines.

In this scenario, in which banks see themselves confronted with excess capital, Dr. Vu Dinh Anh from the Ministry of Finance’s Price Market Research Institute warns about possible inflation if banks and state policies choose the wrong way.

{keywords}

 

The General Statistics Office (GSO) recorded for the first eight months of 2020 that 24,200 enterprises have ceased their operations and are pending dissolution procedures, with another 10,400 enterprises having already completed their dissolution. Additionally, the country had 30,600 companies not operating at their registered addresses, an increase of 39.3 per cent over the same period last year.

Generally, businesses only borrow money when they need it to invest in production or other business lines. However, as economic growth is currently low, many companies dissolve or go bankrupt since they do not have a viable direction to borrow funds for. If any company currently gains a loan from a bank, it is mostly for paying debts accumulated during the pandemic, and not to maintain or even expand their activities.

According to the GSO, this is the main reason for banks being unable to lend money and the generation of excess money in their vaults, which is not only reflected in the unprecedented low credit balance but also the current interbank market with scaled-down interest rates reaching almost zero per cent.

A couple of weeks ago, the overnight and 2-week interbank rates decreased by 0.02 and 0.19 per cent to 0.16 per cent per year and 0.3 per cent per year, respectively. Meanwhile, the 1-week interest rate increased slightly by 0.03 per cent to 0.26 per cent per year. Nevertheless, the prolonged excess liquidity of many banks may further push down the interbank rates closer to zero.

The main reason for this excess liquidity is this year’s imbalance of credit supply and demand as the latter declined rapidly due to the economic impacts of the pandemic. Another reason is the purchase of foreign currencies to increase the reserve thereof to $92 billion, which may even further increase to $100 billion.

Back in 2008, the total registered foreign direct investment reached more than $64 billion, nearly thrice the figure of 2007, which brought in a huge amount of foreign currency. As its impact was not neutralised, it became one of the main reasons for the high double-digit inflation. Excess money in the banking system is the inevitable consequence of the economy’s ability to absorb credit capital. If there is such excess money, banks will find a way to balance supply and demand. Should businesses remain unable to absorb the excess capital, banks will be more likely to relax their lending terms both for old and new loans.

As a result, future bad debt risk will increase. In addition, bank capital can flow into high-risk sectors, such as real estate and securities, thereby bypassing capital adequacy rules and lending restrictions for these areas.

Another way is to reduce the amount of capital raised through lowered deposit rates. Once these decrease, the difference between their interest rates and the lending interest rates will increase. However, at that point, the bank would again be exposed to risks from loosening credit conditions and pushing money into high-risk channels.

A third option is to reduce lending rates to stimulate credit absorption for those customers who still need loans. However, with this model, banks cannot lend money with high interest rates. Yet, as most customers are currently unable to maintain normal revenues, their need for credit loans is limited, which renders reduced interest rates practically useless.

Low economic growth, excess capital at banks, and increased foreign reserves are directly related to the national monetary policy. When banks have excess money, the general trend is that interest rates will fall.

Once the interest rate of the domestic currency falls, the currency itself will also depreciate. Meanwhile, using the domestic currency to buy a foreign one is essentially done to keep the local currency from appreciating due to the excess supply of foreign currencies.

However, buying foreign currency should go together with neutralising measures to prevent the possibility of capital inflows into a market in which banks already have excess funds. Otherwise, this scenario could lead to inflation during the upcoming year. VIR

Credit growth in the first eight months of 2020 reached only 4 per cent

Deposit rates decreased in August, while for the 6-month term the interest rate of state-owned banks decreased by 0.05 per cent. Interest rates of small joint-stock commercial banks with capital under VND5 trillion ($217 million) dropped the most with a decrease of 0.23 per cent, while those of larger joint-stock commercial banks increased by 0.18 per cent.

For the 12-month term, deposit rates tended to decrease for JSC banks ranging from 0.09-0.27 per cent. In contrast, the deposit rates of state-owned banks increased by 0.2 per cent. Deposit rates continue to decline partly due to increased capital mobilisation.

Source: Bao Viet Securities Report for August 31-September 4

 

Dr. Vu Dinh Anh (Ministry of Finance’s Price Market Research Institute)

Inflation not a concern, USD depreciates, capital remains cheap

Inflation not a concern, USD depreciates, capital remains cheap

Capital has become very cheap with the Vietnam dong interest rates in the interbank market having fallen to a four-year record low, according to the Vietnam Interbank Market Research Association.

MORE NEWS

Ngoc Linh ginseng helps Central Highlands locals out of poverty

Growers in the Central Highlands provinces dreamed of escaping poverty when they planted Ngoc Linh ginseng which has made an economic contribution to improving local farmers’ living conditions.

Soc Trang’s Khmer pagoda features giant Buddha statue

With the long-standing bonds of the Kinh, Khmer, and Hoa ethnic groups, Soc Trang boasts a special cultural identity that makes it an outstanding spiritual destination for tourists and Buddhist followers from far and wide.

Smart-homes getting cheaper in Vietnam

In Vietnam, a smart-home installation package costs VND14-25 million.

Vietnamese nationals account largest proportion of Japan’s foreign worker population

Vietnamese nationals account for 25.4% of the total 1.82 million foreign workers who were working in Japan as of the end of October last year, according to the Japanese Ministry of Health, Labour and Welfare (MHLW).

Mekong Delta develops more OCOP products

The Cuu Long (Mekong) Delta’s 12 provinces and the city of Can Tho are developing more products under the country’s “One Commune-One Product” programme.

Major Vietnamese paintings worth millions of dollars at global auctions

2022 represented a successful year for the Vietnamese painting market as three more pieces were auctioned at more than US$1 million each, bringing the total number of valuable paintings to 19. Let’s take a closer look at some of them.

Vietnamese American singer brings Tet Holiday joy to disadvantaged children

In hope to bring the children who lost their parents because of Covid-19 a warm spring holiday, Vietnamese American singer Ha Phuong spent a day to enjoy Tet with them.

How will the economy fare in 2023?

Vietnam’s economy had a prosperous year in 2022 with GDP growth rate of 8.02 percent, a one-decade high.

Female Vietnamese badminton star Thuy Linh placed 50th in world rankings

Vietnamese badminton star Nguyen Thuy Linh has risen to 50th position in the world’s latest singles women rankings, according to the Badminton World Federation (BWF).

Phin Ho ‘shan tuyet’ tea –specialty of Ha Giang

Apart from stilt houses and seemingly endless terraced paddy fields, “shan tuyet” tea, a famous specialty of Phin Ho village, is one of the special things visitors cannot forget once setting foot in Tay Con Linh Mountain in Ha Giang.

Discovering art of making vegetarian dishes in Tay Ninh

Religions and beliefs have made considerable contributions to the culinary culture of Tay Ninh.

Hoi An, HCM City among world's top 25 trending destinations in 2023: TripAdvisor

Germany’s famous travel site reisereporter.de has run an article highlighting the world’s top 25 trending destinations for 2023, including Vietnam’s Hoi An ancient city and Ho Chi Minh City, recently voted by readers of TripAdvisor.

Make-in-Vietnam sleeping machine developed by professor

FRENZ Brainband helps users have faster, tighter and deeper sleep. It can also be used for relaxing and enhancing concentration when working.

Paris Agreement: Lessons on independence, self-reliance, int’l solidarity

The signing of the Paris Agreement on ending the war and restoring peace in Vietnam on January 27, 1973, was a resounding victory of Vietnam’s revolutionary diplomacy in the Ho Chi Minh era.

PM: Lunar New Year comes with new energy

Prime Minister Pham Minh Chinh chaired a meeting of permanent Cabinet members in Hanoi on January 27, speaking of new energy of the nation following Tet (Lunar New Year), the biggest festival in Vietnam.
back_to_top