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Lessons drawn from market shocks in 2008
In 2008, commercial banks entered a big interest rate race, the exchange rate reached a record high of VND19,000/US$ at times, and businesses scaled down their production due to capital shortages. These are market “shocks” from which Vietnam should learn to regulate the economy in 2009.
There is no denying that the monetary policy plays a key role in developing the national economy. In 2008, the Government introduced a tight monetary policy to curb runaway inflation and at the same time stabilise the monetary market.
According to economists, Vietnam carried out its monetary policy in two stages – the first lasting from the beginning of the year to April, and the second from May to the end of the year.
Market management
Before the eight-point solution package aimed at curbing galloping inflation was approved, commercial banks had intensified measures to withdraw cash from circulation by increasing interest rates. The State Bank of Vietnam (SBV) asked commercial banks to raise their compulsory reserves and buy SBV bonds. The SBV also limited the credit growth to 30 percent and provided support for the local stock market.
Dr. Cao Si Kiem, deputy head of the National Monetary Advisory Council, says that monetary policy adjustment in 2008 had two big shortcomings. First, the timing of the adjustment was poor as most commercial banks were weak in terms of liquidity. They had difficulty in getting back their capital from loans provided to the stock and real estate markets. Second, commercial banks were put under pressure when they were asked to buy SBV bonds and increase their reserve requirement, resulting in rising interest rates.
According to Prof. Vu Dinh Bach, head of the Economics Advisory Council under the Vietnam Fatherland Front, it’s thought that only banks played the leading role in curbing inflation, while there was no coherence between fiscal, investment and import-export policies.
Prof. Bach explains that in theory, policies should be implemented synchronously to cope with inflation. The tight monetary policy adopted by the SBV caused many difficulties for small- and-medium sized enterprises because they could not take out bank loans to run business. The State should have had a comprehensive fiscal policy. Banks should have increased deposit interest rates to a level higher than the inflation rate to mobilise capital. In fact, banks raised both deposit and lending interest rates, making it impossible for businesses to access bank loans. In this case, the State should have reduced taxes to iron out snags for businesses.
Tax reduction is an effective tool that allows the State to balance the financial market, says Prof. Bach.
Meanwhile, Dr. Kiem says that gold, which is considered a sensitive commodity of the national economy, was not carefully managed, resulting in a massive import of the product. Currently, Vietnam is among the world’s largest gold importers. Furthermore, the country also failed to manage the foreign currency market, with the VND/USD exchange rate reaching a record high of VND19,000/US$ at times.
In April, the government planned to slow growth and focus on fighting inflation with an eight-point solution package. That monetary policy proved effective in controlling loans and managing foreign exchange rates.
However, inflation pressure remains high as bad debts continue to rise, the possibility of collecting taxes decreases, and over-expenditure stands at 4.95 percent. Vietnam is facing possible deflation. The economy is likely to suffer serious recession if the CPI (shown in purchasing power, incomes, and jobs) declines successively in three or four months.
Flexible monetary policy
In a recent meeting of the financial sector held in Hanoi, PM Nguyen Tan Dung put emphasis on adopting flexible and sound monetary and fiscal policies in 2009. He said monetary policy must be tightened at a level which can reduce inflation and at the same time maintain the economic growth. The stabilization of the macro-economy requires the successful control of prices, exchange rates and interest rates.
To be effective, the monetary policy needs several adjustments, says Dr Cao Si Kiem, who was former governor of the State Bank of Vietnam. They include the synchronization of new and existing policies and the loosening of monetary policy to increase investment in projects that create exports, jobs, consumer products and even credit for consumption. Attention should also be given to lower interest rates and streamlined administrative procedures to allow businesses more access to capital, Mr Kiem says.
The former governor also underscores the need to reduce bank reserve requirement and discount rate.
He analyses that banks and businesses have not ‘met’ although many banks still have abundant capital. The new situation requires new approaches.
“Banks can’t wait for businesses to come to them; they must create favourable conditions for their clients to access capital. Meanwhile, businesses need to seriously consider restructuring themselves to meet banks’ lending conditions.”
In 2009, Vietnamese businesses are expected to encounter more difficulties from the world economy as well as rising production costs under the country’s roadmap of raising electricity and coal prices. However, Vietnam has properly addressed the issues of energy and food and is politically stable.
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