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Loose monetary policy continues as 2021 is ticking away

The State Bank of Vietnam (SBV) is still intensifying the degree of monetary easing, even when many other countries have recently opted for doing just the opposite.

Keeping an expansionary monetary policy in Vietnam is necessary in the context the economy is in the early stage of recovery and the majority of enterprises are in dire need of capital to restore their production and business activities.

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While gold price witnesses a year of wild fluctuations, the money supply has so far remained stable. – Photo: Thanh Hoa

Since the beginning of November, the SBV has injected bigger amounts of dong via the foreign currency buying channel, helping the banking system maintain abundant liquidity. The move has kept interest rates stable at a low level. As per a recent report by SSI securities corporation, within the first three weeks of November, the volume of the dong pumped into the market by means of foreign currency buys—spot and futures deals alike—totaled more than VND60 trillion.

Bigger money supply and credit limit extension

Not only have deposit rates on the Interbank market further declined, interest rates for individuals’ deposits have also fallen. On average, deposit interest rates for six- and 12-month terms dropped 0.01 and 0.06 percentage point respectively, to 4.7% and 5.5%, at the end of October, according to Bao Viet Securities Company.

However, in the first half of November, whereas some banks continued to cut their deposit rates, others started to lift their rates in preparation for higher capital demand during the end of the year. However, it is believed that this trend is phenomenal because the system’s liquidity remains ample, while the SBV itself has reaffirmed its expansionary monetary policy.

Along with the reduction in the buying price of the U.S. dollar and the supply of the dong via the foreign currency buying channel, the SBV has recently lifted credit growth ceilings for certain banks for the rest of this year in anticipation of the economic recovery.

Take TPBank for example. This bank has received the green light for its maximum credit growth rate of 17.4%. In the meantime, Techcombank has been given the cap of 17.1%; MSB, 16%; MBBank, 15%; VIB, 14.1%; and LPBank and ACB, 13.1%. Similarly, other banks have also received higher credit growth ceilings albeit at lower levels, including VCB at 12.5%, VPB at 12.1%, SHB at 10.5%, STB at 10.5%, OCB at 10% and VietinBank at 9.5%.

All of the aforesaid banks are known for their high asset quality and safety ratios, plus a considerable volume of outstanding loans. The higher ceilings mean those banks can step up lending for the remainder of the year. Credit growth as of October 29 has been only 8.72% compared to the end of 2020, far from the expectation of 12-13% for this year.

Apparently, the SBV is intensifying its monetary policy easing, even when many other countries have recently done the opposite. Keeping an expansionary monetary policy in Vietnam is necessary in the context the economy is in the early stage of recovery and the majority of enterprises are in dire need of capital to restore their production and business activities.

However, it should be noted that banks are still applying strict conditions to be met by borrowers for fear of risks in the economy. If credit conditions are loosened excessively, the quality of loans may deteriorate, leading to a rise in bad debt in the future, which is already under much pressure given the number of loans restructured to support customers affected by Covid-19. 

Additional tools

Moreover, the issue of cutting the required reserve ratio has recently arisen again in the hope that it will further assist banks and inject more capital into the economy. A group of scientists from the National Economics University recommended the SBV should conduct a study to lower the required reserve ratio by 0.5 percentage point in the last two months of 2021 and by another 0.5 percentage point in the first quarter of 2022. As a result, the move would lead to a deep fall in lending rates because a 0.5 percentage point reduction in this ratio will free up as much as VND50 trillion.

Currently, the required reserve ratio is 3% for deposits in the dong with terms shorter than 12 months and only 1% for longer than 12 months. That’s why some people find the aforesaid proposal inappropriate. The current level of application is already that low, they argued. Therefore, there would be no leeway for a further decline. However, as the required reserve ratio policy has never been resorted to in the past decade, that the central bank may consider making use of it in the near future to diversify their monetary easing tools cannot be completely ruled out.

The flexible use of such tools is essential in the current context. The crux of the issue is that the expansionary monetary policy should continue until the end of this year, and it is necessary to maintain that policy in the coming time when more pressure will come given the trend of rampaging inflation everywhere. Under this circumstance, quite a few countries would have no choice other than reversing their policies. Since the beginning of this year, there have been nearly 80 interest rate hikes by central banks worldwide.

For example, the fear of inflation is a factor which may prevent the SBV from cutting the policy rate, even though the current deposit rates are significantly lower than the permitted ceiling. SBV Governor Nguyen Thi Hong recently said inflation was below 4% in 2020, but it would come under tremendous pressure in 2022.

The world economy is on the recovery path, on which commodity prices tend to go up—in fact, there have been price hikes, gasoline price for instance. Many developed countries have recorded the highest rate of inflation in history, said Vietnam’s top central banker. Meanwhile, as Vietnam’s economy is considerably open and her ratio of import-export to GDP is more than 200%, the risk of imported inflation should not be overlooked.

Notably, although the policy interest rate is unlikely to drop in a bid to help the banking system reduce input costs, the SBV remains consistent with its goal of further lowering lending rates. One of the solutions recently adopted by the central bank is to encourage credit institutions and foreign banks to cut costs and accept smaller profit to help cut lending rates. What’s more, the SBV is expected to soon come up with an interest rate aid package for businesses in certain industries and key projects.

Furthermore, the SBV has issued Circular 16/2021/TT-NHNN specifying the cases in which credit institutions are not allowed to buy corporate bonds. Once the door to investment in high-yielding corporate bonds is narrowed, banks are forced to boost lending for the manufacturing sector by offering more competitive interest rates.

Most recently, at a seminar on handling bad debt during the Covid-19 pandemic and perfecting legal policies organized by the Vietnam Bankers Association on November 24, Le Trung Kien, on behalf of the inspection department of the SBV, said the central bank is mulling over a certain delay in the application of the maximum ratio of short-term capital used as medium- and long-term loans, so as to give banks more resources to support their clients. Remarkably, the SBV last year put on hold its schedule for the application of such ratio for another year.

Source: SGT

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