The global and domestic economic situation in 2017 has witnessed complex changes, strongly affecting Vietnam’s economic policies in general and the monetary policy in particular. However, thanks to the State Bank of Vietnam (SBV)’s synchronous management, in 2017, monetary policy implementation has achieved positive results, contributing significantly to inflation control, macroeconomic stability and economic growth.

Actively orientating the market

Synchronous management of monetary policies has helped to facilitate macroeconomic stability and economic growth in 2017.

In 2017, the world economy has continued to recover. However, the monetary commodity market is volatile with the rise again of oil and dollar prices. Economic recovery has led to tougher tendencies in operating the monetary policy by developed countries, whereby the US Federal Reserve System (FED) has raised its interest rates three times in the year, while the Bank of Canada raised its interest rates for the first time in seven years, and the European Central Bank announced a reduction in the scale of asset purchases from the beginning of 2018. In Vietnam, economic growth is positive, with the consumer price index (CPI) controlled under the set target of 4% and inflation basically remaining stable.

In the context of such macroeconomic developments, the SBV has managed the monetary policy instruments in a smooth manner, thus controlling the monetary targets in accordance with the administrative objectives. Since the beginning of the year, the central bank has been steadfast in implementing monetary policies in an active and flexible manner, with close coordination with the fiscal and other macroeconomic policies to control inflation in line with the objectives set by the National Assembly, while stabilising the macro-economy to keep the economic growth at a reasonable level, thereby ensuring the liquidity of credit institutions, and stabilising the monetary market. Total payment is forecast to increase by 16-18% and credit growth at approximately 18%.

In the next few days, the year 2017 will come to a close. It can be said that the set goals have basically been fulfilled. Rational measures to regulate the money supply have helped to stabilise inflation, while supporting the adjustment of commodity prices under the State management to fulfill the CPI and inflation targets.

The liquidity of the credit institution system has also been ensured, with surplus at a reasonable level and low interbank interest rates to promote high credit growth at the beginning of the year. It also helps to support and stabilise the deposit rate, facilitate the Ministry of Finance to successfully issue Government bonds with large volume for long terms of up to 15-30 years, and contribute to the sharp decrease in interest rates, by 0.62-1.89 % compared to the end of 2016.

The SBV's interest rate management has helped to stabilise interest rates and even lower interest rates, despite the pressure to increase them in the first few months of the year; but from July 10, in order to help reduce operating costs for businesses and contribute to economic growth, under the guideline of the Government, the SBV reduced the rates by 0.5% per year for maximum short-term interest rates in priority areas, along with a 0.25% per year reduction for operating interest rates.

The SBV also instructed the credit institutions to continue actively implementing measures to reduce costs and improve their operational efficiency in order to facilitate the reduction of lending interest rates for priority sectors. As a result, the interest rate level has fallen sharply (only accounting for 40% of the interest rate at the end of 2011), consistent with the objectives on operating currency movements and inflation, while ensuring the harmonious interests of the sender's, credit institutions and borrowers.

Right from the beginning of the year, based on the GDP growth target of 6.7% and the average inflation rate of roughly 4%, the SBV set a target of achieving credit growth at 18% with reasonable adjustments in line with the actual situation. Furthermore, the bank also assigned credit growth tasks to each credit institution and considered the adjustment of the credit growth goals in a flexible and prudent manner, avoiding any negative impacts on macro balances, inflation control and security for the operation of credit institutions in 2017 and the following years.

The State Bank directed the credit institutions to direct their credit flows in the fields of production and business, in prioritised sectors according to Government policy, while tightening control over credit in high risk areas. Accordingly, credit structure has shifted positively in the direction of increasing the proportion credit in sectors that are the driving force for economic growth, such as industry, construction and rural agriculture. The efficiency of credit growth for economic development has tended to improve, with the credit growth needed for a 1% increase in economic growth falling from 3.84% in the first quarter to 3.1% in the second quarter and down to 2.52% in the third quarter.

Another highlight in the monetary policy in 2017 was the stability in the exchange rate, the foreign exchange market and the value of the Vietnamese currency. The foreign currency market and the exchange rate has been stable, with good market liquidity helping the credit institution system to earn a net profit in buying foreign currencies from customers, while the legitimate foreign currency demands of organisations and individuals have been timely met. Up to now, the VND/USD exchange rate has only increased by 1.1-1.2% on average, making the domestic foreign exchange market much more stable than other countries in the world and in the region.

Compared to other currencies in Asia, the Dong is one of the most stable currencies. With flexible exchange rate management mechanisms, incorporating rational currency liquidity regulations and the close monitoring of market liquidity and foreign currency situations in order to adjust the appropriate exchange rate, in 2017, SBV has been very successful in buying large amounts of foreign currency from credit institutions, raising the country's foreign exchange reserves to a record level of nearly US$48 billion.

Since early this year, the SBV has bought approximately US$8 billion worth of foreign currencies to serve as a safe reserve for Vietnam amid fluctuations in the future. The increasing scale of foreign-exchange reserves also contributes to enhancing the position of Vietnam in the ranks and assessments of international organisations and foreign investors.

2017 is also considered as a milestone in the process of restructuring credit institutions. After the completion of the first phase of the restructuring plan, the target of stabilising credit institutions system has been fulfilled, including the banks taken over by the SBV.

The SBV is on track to carry out the second phase of the restructuring plan under the Government Decision 1058. The National Assembly's Resolution No 42 on dealing with non-performing loans of credit institutions approved in mid-2017 and the bill on amendments and supplements to the Law on Credit Institutions approved in November 2017 will serve as important legal conditions to implement the restructuring plan in 2018 and the following years.

Challenges face monetary policy in 2018

Monetary policy is anticipated to face many challenges in 2018 due to the effects of world politics and the geopolitics situation, the interest rates of the US dollars in the world market, climate change, and cybersecurity, among others. Developments in the world financial and monetary market and domestic macroeconomy will also affect the SBV's operation of monetary policy and the Vietnamese financial and monetary markets.

Many analysts have pointed out two basic factors that may affect the exchange rate policy in 2018, including the supply of foreign currency and the value of the US dollar. The strength of the US dollar will be estimated based on the US Dollar Index, the interest rate changes of the FED, and the US economic situation.

Notably, the Republicans' tax reform bill that was recently passed by the Senate is expected to boost the US economic growth, which will in turn create pressure on the VND/USD exchange rate in 2018. The FED's anticipated interest rate increases in 2018 along with the fluctuations of global trade, and oil and gold prices will also affect the dollar-dong exchange rate.

Meanwhile, the domestic economic situation including non-performing loans, import-export activities, national reserves and macroeconomic stability in 2018 will also create an influence on the dollar-dong exchange rate, requiring the SBV's flexible regulation of the exchange rate policy.

In addition, interest rates are forecast to remain stable in early 2018 but will come under pressure in the remaining months of 2018. Mid and long-term interest rates are also forecast to increase slightly due to the increase in the demand for long-term loans, while commercial banks are facing a shortage of long-term capital. Lack of long-term capital may affect investment in real estate and other mid and long-term projects in 2018.

The SBV should develop consistent orientations and policies to ensure the target of stabilising interest rates when deposit interest rates are subjected to increases. The implementation of the monetary policy also requires a more active and flexible approach from the SBV, in combination with the fiscal policy and other macroeconomic policies.

Significant achievements in restructuring the banking sector in the 2011-2015 period have helped to boost the stability and safety of the credit institution system and ensure the legitimate rights and interests of depositors.

In the second phase of the restructuring plan from 2016-2020, the completion of legal documents will also help to support the restructuring of credit institutions aligned with the settlement of non-performing loans.

However, the effectiveness of the restructuring plan will depend on specific actions from the system of credit institutions and the SBV.

It is expected that the banking restructuring process will be accelerated and promoted in 2018 to help boost economic growth. It is also required that the monetary policy in 2018 should curb the inflation rate at 4%, while supporting the economic growth target of 6.5 to 6.7% and reducing the non-performing loans ratio to less than 5%. In addition, the SBV should promptly handle the cross-ownership between banks according to the bill on amendments and supplements to the Law on Credit Institutions.

Nhan Dan