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Danger swirls amid monetary stance
Cutting base interest rate, reserve requirement ratio and interest rates paid to required reserves are in line with the government’s economic stimulus package designed to create better access to banking credit for local enterprises.
Better access to bank loans will help them restructure businesses and push exports. However, cutting the market interest rates increased pressure on local lenders. The interest rate and term gaps are making extending loans unprofitable and only depositors can benefit from this. Generally, monetary relaxation could come together with three risks, rising inflation, higher trade deficit and increasing non-performing loans (NPLs) ratio in the banking system.
This would force banks to have higher loan-loss provisions and eventually eat into their profits. Nevertheless, as the economy is going through a slowdown, banks should certainly be shoulder-to-shoulder with enterprises. Those risks have been thoroughly considered by the government, the State Bank and the National Committee for Financial Supervision. We have all prepared solutions to address negative side-effects of these monetary relaxation policies.
From our point of view, the risk of back-to-rising inflation is not considerable as the material, commodities prices are still on the way down. Thus, the risk of cost-push inflation is minimised. Meanwhile, the consumer spending is still low, exports are also slowing down, the supply- side is strong and thus, demand-pull inflation risk should not be considerable.
The trade deficit in 2009 is forecasted at a mild level. In line with the gross domestic product (GDP) estimated at merely 6 per cent, the ratio of investment/GDP should be at around 35-36 per cent. If the domestic saving ratio stands still at 30 per cent of the GDP, the current account deficit would stand around 6 per cent of the GDP, lower than 10 per cent level seen in 2008.
Bad debt in the banking system is a middle-term concern, thus, the government, the State Bank and commercial banks need to coordinate to restructure bank credits in coming months. The State Bank’s estimations put the NPLs ratio at 4 per cent by the end of 2008 equal to VND56,000 billion ($3.2 billion), while the ratio by the end of 2009 should reach around 5 per cent.
This level is acceptable and still within the NPLs ratio target of 5 per cent in Vietnam’s banking development strategy in 2006-2010 period. However, the total amount of banks’ loan-loss provisions is estimated enough to cover up to 60-70 per cent of those bad debts. The NPLs ratio varies from bank to bank and thus the managing authority should set close and watchful eyes on small scale banks that normally bear higher bad debt risks.
A big question recently raised was that in case the domestic consuming demand is still low, whether the monetary relaxation policies would work? In fact, when the consumption demand is low, manufacturers are not keen to take bank loans. Thus, the comprehensive stimulus package requires additional measures to push public consumption demands such as lowering taxations, wage increases, social benefit increases, accelerating investments on public works such as hospitals, schools, irrigating system, electricity supply and residence buildings for low-income people.
The government should also financially assist enterprises with a large number of Vietnamese employees, mainly utilising domestic inputs such as materials to stimulate domestic consumption demand. Relaxed monetary policies would reduce manufacturing costs and if this relaxation coupled with appropriate foreign exchange and taxation polices would make Vietnamese products more competitive in international markets.
Looser monetary policy would pave the way for small- and medium-sized enterprises to modernise their production line with advanced technology relatively cheaper now. This would strengthen local enterprises in terms of improving product quality, a requisite to ensure export revenue after this global economic crisis is over.
As far as the foreign exchange polices are concerned, this is a sensitive issue. The economy is still in dollarisation stance and depositors tend to convert Vietnamese dong into greenback holdings. Foreign exchange policy should be adjusted with consideration to fluctuation of US dollar’s value against other international currencies as well as the ratio of short-term greenback borrowing of local enterprises.
However, the trade and current account deficits and national foreign borrowing would be improved only by higher export revenue. Thus, the foreign exchange policy would need to eventually assist exporting enterprises. From my point of view, Vietnamese dong’s depreciation against US dollar should be around 5-6 per cent in 2009 following 5 per cent level in 2008.
VIR
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