Lowering interest rates seen challenging: expert
It will be hard for banks to lower interest rates in the coming years, depending on the actions of the U.S. Federal Reserve and the management activities of the State Bank of Vietnam (SBV), a veteran economist stated at a forum in Hanoi today, May 8.
Held by the Saigon Times Group and SBV, the banking forum, titled “For Vietnamese banks’ further development,” was aimed at providing insights into some of the underlying issues of the banking sector.
Vo Tri Thanh, former vice president of the Central Institute for Economic Management, said that the 2018 banking sector saw macroeconomic stability, sound inflation control and stable interest and exchange rates between the U.S. dollar and Vietnamese dong.
Thanh noted that the exchange rate was under considerable pressure in late 2017 and early 2018, due to both local and international developments.
“The SBV administered monetary policy cleverly and injected money properly, as well as cooperated with the Ministry of Finance to issue government bonds more smoothly,” he said.
Also, the SBV was adept at meeting liquidity requirements and stabilizing the interbank interest rate to safeguard the exchange rate but avoid causing fluctuations in interest rates in the market.
However, according to the veteran economist, the three key tasks for the SBV since 2012 are issuing a stable monetary policy to fuel growth, dealing with nonperforming loans and restructuring banks to meet best practices, such as Basel II standards.
He remarked that interest rates will be difficult to drop further, while the effectiveness of the financial system for the mid- and long term is likely to be affected.
He pointed out that intermediate targets for monetary policy are too high. For example, money supply and credit are administered by both the volume and the interest rate targets. Meanwhile, the exchange rate, to a certain extent, despite being much more flexible, is still a policy tool.
“We are preparing for the mid-term. Vietnam needs to adopt inflation targets where the development of the financial system is based on the management of the price level, referring to interest rate. This is a huge challenge for SBV,” he said.
Inflation targeting is a monetary policy regime in which the central bank sets an explicit target inflation rate for the medium term and announces it to the public.
Alongside inflation and the trade balance, the exchange rate will come under pressure from the escalating trade war between China and the United States. A positive side effect, however, is that more investment is shifting to Vietnam due to this war.
In her opening address, Deputy Governor of SBV Nguyen Thi Hong noted that the central bank will still adopt a prudent yet flexible monetary policy, aligned with other fiscal and macroeconomic policies, to curb inflation, maintain macroeconomic stability and support economic growth.
Can Van Luc, an expert in finance and banking, stated that mid- and long-term capital for the national economy is still reliant on the banking sector, accounting for some 50%-60% of total outstanding loans.
He noted that this situation will place great pressure on and pose significant risks to credit institutions. As a result, he called for improvements in the role of the capital market over the long term since banks are specifically expected to offer short-term loans.
To spur the growth of the financial market, according to Luc, it is necessary to purge inflationary psychology and consider important scenarios involving volatility, including measures to attract more foreign investment and raise exports to ensure macroeconomic stability.
SBV’s Deputy Governor Nguyen Thi Hong stressed that the central bank aims to increase total payment instruments and credit by some 13% and 14%, respectively, this year.
The SBV will employ open market operations to regulate the liquidity of credit institutions at a reasonable level and thereby help stabilize the monetary market. It will also use reserve requirements – which sets the minimum level of reserves – in combination with other monetary policy tools.
She added that the central bank will also direct interest and exchange rates in a way that suits macroeconomic balances, market developments and the goals of monetary policy, while using policy tools and interference measures when necessary to stabilize the foreign exchange market.
The central bank has asked credit institutions to work out measures to follow stake ownership regulations as well as handle violations on cross ownership, according to Bui Van Hai, deputy head of the SBV’s Banking Supervision Agency.
The SBV reported that as of late January this year, credit institutions had addressed some VND204.4 trillion worth of nonperforming loans, or over 40% of the total. In late 2018, the rate of bad debts was lowered to less than 2%.