The State Bank of Vietnam (SBV) has announced some measures to strongly intervene in the local monetary market. Accordingly, the bank will increase the basic interest rate and adjust the exchange rate. Economists say this is an essential step to stabilise the current economic situation.
The SBV decided to increase the basic interest rate from 7 to 8 percent and allow commercial banks to offer an interest rate of 11 percent to mobilise capital, while ensuring their lending ability and liquidity.
Pressure on Vietnamese Dong (VND)
The Standard Chartered Bank reports that the increase in the basic interest rate is a good signal for the VND, but there are still some negative movements in the monetary flow. The balance of payment in the short term may continue to put pressure on the exchange rate between the VND and USD as the foreign direct investment (FDI) inflows are on the decline. Moreover, overseas remittance cannot help settle the country’s trade deficit.
Tai Hui, head of the Standard Chartered Bank’s Asian research department, says that there are two factors that put pressure on the devaluation of the VND. First, the increase in the price of gold makes local investors pay more attention to gold than the Vietnamese currency. Second, the trade deficit may reach more than US$2 billion a month. Although this level is lower than in the first half of 2008 (about US$2.5-3 billion), it has raised great concern about the balance of payment, especially when FDI and overseas remittances are forecast to increase slightly.
The SBV’s decision to limit the range of the exchange rate has reduced the gap between the bank’s officially-listed rate and the “black market” rate.
According to Tai Hui, the VND-USD exchange rate will stand at around VND18,500/USD by the end of 2009 and then increase to VND18,600/USD by the end of the first quarter of 2010, VND18,800/USD by the end of the second quarter, VND18,900/USD by the end of the third quarter and VND19,000/USD by the end of 2010.
Regarding the increase in interest rates, Tai Hui says it is the beginning of a new trend to raise the interest rate. “Currently we predict that the basic interest rate will surge to 10 percent by the fourth quarter of 2010, higher than our previous prediction of 9 percent. This may lead to an increase in the lending interest rate to around 15 percent,” he adds.
Initial step to tighten monetary policy
Looking back at previous monetary policy, Vietnam raised the basic interest rate to a rather high level of 14 percent and then had to reduce it. In April 2009, the basic interest rate stood at 7 percent and interest rebate at 5 percent and these rates were maintained for a relatively long time.
According to Dr. Vu Dinh Anh, deputy head of the Ministry of Finance’s Price and Market Research Institute, this was a measure to gradually tighten control of monetary policy. As a result, credit rose 33 percent in October and 34 percent in November. It might even reach 40 percent by the end of this year if things are still under control.
More important still, some economic argue credit growth is often faster than the rate of mobilising deposits. Now Vietnam caps the credit interest rate at 150 percent above the basic interest rate to help banks raise the amount of deposits. The increase is a step towards reducing the risk of high inflation, which is expected to return in 2010.
However, Mr. Anh worries that in the future, banks will be confronted with the possibility of some businesses borrowing capital with interest rate subsidies but failing to repay the debts. Then the ratio of bad debts to total credit will continue to climb up.
To solve this issue, Mr. Anh says banks must push up the collection of debts and increase the scale of credit. Banks must also coordinate with appropriate authorities to deal with the imbalance of foreign currency, especially in the real estate and securities sectors.
Because of the recent rise in the value of the US dollar and gold prices, the increase of the basic interest rate is significant for improving the value of domestic currency and limiting the rise of exchange rates, which can negatively impact the macro economy. As foreign currency earners such as exports or overseas remittances show little signs of improving compared to 2008, controlling the supply of Vietnamese cash by higher interest rates is a tool to ensure a stable exchange rate.
Source: VOV
Source: QDND
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