Prime Minister Nguyen Xuan Phuc has called for an increase in credit growth to 21 per cent this year to help the country hit its economic growth target, potentially adding to concerns over the pace of new lending.

The Prime Minister told a government meeting last weekend of the goal, emphasizing the importance of hitting the 6.7 per cent GDP growth target for the year.

Data from the General Statistics Office showed that credit growth during the first half was 7.5 per cent compared to a year ago; the highest in six years. Meanwhile, State Bank of Vietnam (SBV) Governor Le Minh Hung said that credit growth at a pace of 9.06 per cent was seen as at June 30 compared to the end of 2016.

In February, the central bank set a 2017 credit growth target of 18 per cent, and there has been no announcement that the official target has been increased.

In July, the SBV sprang a surprise on markets by reducing the refinancing rate, rediscount rate, overnight electronic interbank rate, and the rate of loans to offset capital shortages in clearance between the central bank and domestic banks by 25 basis points.

The cuts, which come three years after the previous move, reduced the refinancing rate to 6.25 per cent and the rediscount rate to 4.25 per cent and was aimed at stimulating the pace of economic growth towards the 6.7 per cent target for the year.

Few would question whether there was room to cut rates but it comes at a cost of putting upwards pressure on prices going forward as well as potentially fueling a credit bubble. The International Monetary Fund said in July that the SBV should stand pat on policy rates and check its spiraling credit growth.

If the Prime Minister’s goal becomes an official target, this could make further interest rate cuts more likely, said ANZ economist Ms. Eugenia Victorino. “But then the quality of credit growth and the quality of growth overall in the economy may be at risk,” she said.

Vietnam is still suffering the fallout from the 2011 banking crisis, which was caused by excessive lending into sectors such as real estate. But the government is also hard pressed to meet its 2017 growth target after the economy grew at an annualized rate of 5.73 per cent in the first half. Growth of 6.21 per cent last year fell short of the revised target of 6.3-6.5 per cent.

“Vietnam should stimulate domestic consumption, create market confidence, boost investment in manufacturing and business, strive for credit growth above 21 per cent, and reduce input costs for manufacturing and business,” Prime Minister Phuc was quoted as saying.

He also put emphasis on restructuring State-owned enterprises and equitization under a plan to sell more shares this year.

A host of lenders, both State-owned and private, have recently asked the SBV to loosen credit growth quotas for this year after using almost all of their quota during the first half, though concerns remain whether this may become problematic.

One trader at a Vietnamese bank said the central bank was capable of ensuring credit growth topped 21 per cent by the end of the year, but she questioned whether this was sensible.

“I don’t think the central bank needs to inject money,” she said. “There are risks. When they inject that much VND, there could be an impact on the exchange rate.”

VN Economic Times