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Central bank cuts key interest rates to spur growth
The State Bank of Vietnam (SBV) Monday cut its three main interest rates for a second time in two weeks to stave off an economic slowdown.
It cut the benchmark dong base rate to 12 percent from 13 percent, effective November 5, according to a statement on its website. Commercial banks’ dong lending interest rate would be capped at 18 percent, the statement said.
The discount rate, or the rate at which the central bank buys paper from banks, would be cut by one percentage point to 11 percent from 12 percent, and the refinancing rate would drop to 13 percent from 14 percent. The central bank uses the refinancing rate for loans to commercial banks.
SBV also cut the amount of compulsory dong reserves that banks have to set aside to 10 percent from 11 percent.
The government has tightened monetary policy to battle inflation and large trade deficit for much of the year, but it appears increasingly concerned that the global credit crisis and looming slowdown could drag down growth.
“The focus is shifting to growth from inflation,” said Matt Hildebrandt at JPMorgan Chase Bank in Singapore.
The country’s annual inflation slowed for a second month in October. Consumer prices decreased 0.2 percent in October, the first monthly fall since March 2007, according to the General Statistics Office.
Lower inflation has “allowed the SBV to loosen its monetary policy, aiming to … reduce companies’ difficulties,” deputy director of the SBV’s Banking Development Strategy Department, Nguyen Dai Lai, told Thanh Nien Daily.
Last week, the government reduced this year’s economic-growth target to 6.7 percent, lower than an earlier forecast of 7 percent, warning the global financial crisis is hurting demand for exports, while floods this past week destroyed crops and threatened cattle and poultry.
“This reduction is necessary for the economy to grow because companies are complaining that lending costs are still at high levels, even after the last key-rate cut in October,” said Phan Thi Chinh, Hanoi-based deputy general director of the Bank for Investment and Development of Vietnam (BIDV), the country’s second-biggest bank.
The central bank raised rates three times earlier this year to as high as 14 percent, prompting banks’ lending rates to rise to 21 percent and cutting demand for loans. Even after the first reduction on October 20, Vietnam’s benchmark rate was still the highest in Asia, along with Pakistan’s.
“The rate cut today will help banks and companies alike as it’s easier for both to make and get loans,” Chinh said.
Lending rates
The central bank’s move will “help commercial banks have more liquidity,” Lai said, referring to the move to decrease the compulsory reserve. He expected them to have funds of more than VND10 trillion (US$606.1 million) at their disposal.
State-run banks began cutting rates on dong loans to prime clients by up to 1.5 percentage points to around 15-16 percent following the central bank’s announcement.
The Bank for Agriculture and Rural Development, Vietnam’s biggest lender by assets, and Vietnam Development and Investment Bank, the second-largest, lowered dong lending rates to as low as 15 percent, according to the statement.
The third largest, the Bank for Foreign Trade (Vietcombank) cut lending interest rates to 16 percent and to 15.2 percent for major clients.
“Obviously the government wants to ensure that it has sufficient liquidity in the economy to stimulate growth,” said Adrian Cundy, head of research at VinaSecurities Joint-Stock Co. in Ho Chi Minh City. “It is still better than 18 or 19 percent. The banks are not going to give loans to everybody but the margin will be better.”
The central bank also said Monday that loan growth in January to October slowed to 19.6 percent from 37.73percent in the same period last year, while growth in bank deposits slowed to 10.59 percent from 32.97 percent.
The bank did not provide the value of the loans and deposits.
“The monetary market and banking activities have stabilized, with interest rates in sharp decline and a surplus in dong funds,” it said.
“Deposits and loans are expected to pick up,” the bank added.
Promote investment
The reduction in borrowing costs is intended to make it possible for companies to access loans, promote investment and support production, the central bank said.
“After fighting inflation for a long time, it is time for the government to stimulate economic growth since inflation is under control,” said Le Ba Hoang Quang, chief economist at Sacombank Securities Inc.
However, he said, companies’ biggest problems are not high interest rates but fewer consumers.
“Firms are facing obstacles in absorbing capital as they can’t sell their products in an economy with weakening purchasing power,” he said.
The government said in a statement last Saturday that it targets economic growth of 6-6.5 percent next year and export growth of 12 percent.
The Ministry of Industry and Trade last month set a target of 18 percent growth in exports to $77 billion.
With the economy slowing down, the government should further cut interest rates, BIDV’s Chinh said.
Commercial banks would have to restructure repayment schedules for non-performing loans because of the global financial crisis that has slowed production and exports, the central bank said in the statement.
Non-performing loans were worth VND35 trillion ($2.1 billion), or 2.9 percent, by the end of the third quarter, according to a statement posted on the government’s website Saturday.
Thanh Nien, VNA
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