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Equality needed in credit allocation: expert
Jonathan Pincus, senior economist under UNDP in Vietnam, now works for the Fulbright Economics Teaching Programme (FETP), believes that Vietnam send capital to places which can create profit from that capital.
Mr. Pincus, in a recent interview with the press, affirmed that what is happening in Vietnam cannot be called ‘deflation’. He said that in fact, the inflation rate remains at very high levels. In fact, price increases have been slowing down as oil and food prices have been decreasing sharply all around the globe.
“This does not mean deflation, this just means a slowdown in price increases,” he said.
Deflation occurs when prices decrease as a result of lower demand than supply, when people, fearing about the future, decide to keep cash and only spend money on the most necessary things. Meanwhile, these factors are not occurring in Vietnam.
The State Bank of Vietnam has lowered the basic interest rates, two times within one month, which is understood by people as an action aiming to loosen the monetary policies.
It is now too early to talk about the impacts of the move. However, Mr Pincus has warned that the high inflation may return if the government loosens monetary policies too rapidly.
Commercial banks have slashed lending interest rates and pumped more capital into the market.
When asked about the possible impacts of injecting capital in the market, Mr Pincus said that it would still depend on how the capital would be used and the impacts of the money injection on the health of the VND. When interest rates go down, while the inflation rate remains high, people do not want to keep VND, but gold or dollars, a situation which Vietnam faced in May and June.
The government needs to keep a close watch over VND capital mobilisation to find out the reactions of people to the interest rate cuts. If people do not want to keep VND, this means that there exist problems with forex management, which proves to be bad for the fight against inflation.
Mr Pincus believes that Vietnam’s economy growth will slow down in the last months of the year and this may last until the first quarter of 2009 as the factors supporting economic growth do not exist anymore. Exports have been decreasing, foreign direct investment will slow down, while overseas remittance will also go down due to the global economic recession.
The things Vietnam needs to do now are to continue fighting inflation, stabilise the foreign currency market, improve the health of commercial banks. The three tasks should be implemented this year before Vietnam returns to its goal of high economic growth rate next year, when the world’s situation is more stable.
If Vietnam still wants to obtain a high economic growth rate by pumping in more capital, it will face high inflation and the devaluation of the local currency.
Vietnam most needs to pay attention to where the capital is flowing.
Many state-owned enterprises, which have low investment efficiency, can easily access bank loans with low interest rates, while private businesses, which create jobs and profit, find it difficult to borrow money from banks.
In principle, the market will make the capital flow into the places which can bring highest profit. However, the situation is a little different in Vietnam.
The Vietnam Shipbuilding Industry Group can borrow a huge sum of money from banks. How many jobs and how much profit will be created from that sum of capital – nobody knows.
Therefore, the most important thing in capital allocation is equality in bank credit access.
TBKTSG
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