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Vietnam’s banking operations aim at containing inflation and coping with economic recession
The year 2008 ended up with a variety of the world economy’s complicated and unforeseeable turbulences. It was also the year that Vietnam’s banking sector had to face unprecedented challenges over the past 20 years of renovation (Doi Moi).
From early 2008, based on the Resolutions of the National Assembly and the Government on the targets and tasks of socio-economic development in 2008, SBV set forth 11 sets of key tasks and measures for the banking sector including the following major contents: improving the regulatory framework in monetary management and banking operations; renovating and enhancing monetary policy management based on market principles and in line with the objectives of curtailing inflation and fostering economic growth; effectively meeting capital demand for economic development while taking close control over credit size and quality; restructuring and enhancing banking inspection and supervision; accelerating the process of restructuring and improving operational capacity and competitiveness of domestic credit institutions; pushing forward modernization of banking technology, the payment system and the banking information system; complying with banking liberalization roadmap in accordance with WTO commitments; better minting the banknotes and cash circulation to meet the economy’s requirements; strengthening organizational and managerial structure, functions and tasks of SBV’s affiliated entities; focusing on administrative reforms; and promoting information and communication on all aspects of banking operations.
The ongoing subprime mortgage crisis spreading beyond the US border to become the global financial crisis and economic recession could not be brought to an end and continued to worsen bad debt and default loan situation, causing the massive closing of banks in the US and other economies. In the US alone, 23 banks have been closed since the beginning of 2008, pushing up unemployment rate of the country, by October 2008, this figure was 6.7%, that is 2 percentage points higher than 2007.
Challenges that economies had to cope with in 2008 were highly complex and unpredictable. Whereas the first half of the year witnessed a rapid acceleration of oil and food price, the decline of real estate and stock market as well as political unrests which imposed a global pressure on many countries’ inflation rate and economic growth, in the second half, oil price plunged from the record high of 147USD/barrel in mid July to just under 40USD/barrel in mid December, food price also experienced a sharp decrease, implying deflation pressure. The world economy turned around from high inflation risk to the opposite extreme of deflation and this tendency, together with global recessionary situation, will continue to pose a threat to economies in 2009.
Vietnam’s economy in 2008 had to face not only the common world economy’s unforeseeable ups and downs but also its internal difficulties namely scaring inflation, the record trade deficit (over 14% of GDP), and continuous downturn of the stock market. In such context, in order to maintain macroeconomic stability and pave the way for sustainable development, the Government shifted its priority from aiming at high economic growth rate to containing inflation and retaining growth at a proper rate. However, in the last months of 2008, economic development and inflation of Vietnam were also affected by the world’s common trend, hence requiring proper adjustment of macroeconomic indicators. In November 2008, the Government introduced 5 sets of measures to prevent economic downturn and maintain macroeconomic stability with special emphasis on tight yet flexible and effective fiscal and monetary policies to ensure both economic growth and macroeconomic stability.
In the complex context of the world and domestic economy, in the first six months, SBV made timely reactions by synchronized and vigorous tightening monetary policies to effectively curb inflation and stabilize macroeconomic situation. Monetary policy instruments were utilized in a flexible manner to withdraw money from circulation while ensuring the liquidity of the market and the economy as a whole and managing exchange rate by market forces. In parallel, SBV also strengthened oversight and supervision over operations of the foreign exchange market and credit institutions, preventing overheated credit growth which might impose a threat to the network security of these institutions.
Measures to manage monetary policies in the first six months showed positive results, greatly contributing to maintaining macroeconomic situation and putting inflation under control. Given these encouraging signals in macro economy and inflation rate from July 2008 to date, SBV has step by step eased its monetary policies with flexible measures to promote production and trade as well as proactively prevent the risks of an economic decline.
Those specific measures are as follows: timely reduction of the base interest rate and reserve requirement levels to facilitate the lowering of lending rates of credit institutions in their turn and access to bank loans by enterprises at acceptable rates; widening the USD trading band to 3% against the average interbank rate and, at the same time, gradually raising the average interbank rate to better align with the foreign exchange market’s supply and demand as well as supporting export and constraining trade deficit. In practice, following these moves of SBV, commercial banks promptly started reducing their lending rates. The short term lending rates of commercial banks in December 2008 commonly ranged between 12% and 13% p.a. For some projects and areas of priority like export, small and medium enterprises (SMEs), farmers, some commercial banks only offerred interest rates of 10% to 11% p.a.
Meanwhile, SBV also instructed commercial banks to properly adjust their business plan and credit structure in line with economic development orientations and policies in of the Communist Party, the State and the banking sector. This had to be done in parallel with close control of credit quality, prioritizing capital for production, export, import of essential commodities, rural and agricultural development, SMEs, effective investment projects, etc. All these aimed at ensuring responsiveness to financial needs for maintaining reasonable growth and preventing economic downturn. Compared to late 2007, credit channeled to the private sector increased by 37%, to the state sector by 12%, to export by 37%, to the production sector by 34%, to rural and agricultural development by 30% and to other policy-based poor households by 40%. Total non-performing loans of the whole sector accounted for only 3.5% of the total credit outstanding.
SBV continued to improve the regulatory framework in monetary and banking operations, to make recommendations to the Government and the National Assembly to do away with discrepancies in various laws to pave the way for stable and sustainable development of the banking sector, directing credit institutions to accelerate their restructuring programs and enhancing their performance and competitiveness as well as fostering modernization in banking technology, promoting non-cash payment to make full use of the society’s idle capital resources for production expansion and investment.
It can be asserted that despite numerous difficulties in 2008, the banking sector basically fulfilled the tasks assigned by the Communist Party and the State. Its operations have made a considerable contribution to containing inflation, restraining trade deficit and maintaining economic growth. The money market was kept under control; interest and foreign exchange rates hovered around a proper level; credit institutions’ liquidity was ensured; credit extension was kept at reasonable pace, thus meeting capital demand for economic growth in a timely way. Credit institutions operated in a secured and forward direction. By the end of 2008, equity of the whole banking sector increased by 30% compared to the end of 2007, and capital adequacy ratio increased from 8.9% to 9.7%. Credit institutions continued to focus on developing new technologies, services and modern banking conveniences, operational network was effectively consolidated and expanded, hence further facilitating enterprises and the public to get access to banking services. In particular, in 2008, one joint-stock commercial bank opened a branch abroad.
The banking sector has been highly commended by the Communist Party, the National Assembly and the Government for its achievements. 10 banking entities were awarded with the Prime Minister’s Certificate of Merit for their timely measures to curb inflation, stabilize macro economy, meet capital demand for production expansion, export and ensure social protection. Those results are attributed to strict and timely guidance of the Communist Party and the Government in addition to close collaboration among ministries and local authorities as well as enormous efforts of the banking sector itself.
In addition to the obtained achievements, in the context of complicated movements of the global and domestic macroeconomic and financial situation and restricted forecast and analysis, the implementation of measures for monetary policy management of SBV was short of flexibility and synchronization from time to time; fluctuations in the money and exchange markets in the first months of the year caused certain difficulties for operations of credit institutions and enterprises; operations of credit institutions had potential risks; and the quality of banking services was still weak, thereby failing to meet the demand of the society.
Due to the impact of the global financial crisis, it is forecasted that the world economic growth in 2009 will be lower than 2008; the developed countries may enter into recession; and the economic growth of the developing and emerging countries will decline or be at a low rate. Savings, investment and capital flow of all the countries will decline or increase at lower rates against the previous years. This global economic situation will cause adverse impacts on economic growth of Vietnam. Therefore, the banking sector will face a lot of difficulties and challenges in its operations in the year 2009.
Based on the socio-economic development tasks in 2009 approved by the National Assembly, SBV defines the objectives, orientation and tasks for the operations of the banking sector in 2009 as follows:
- The whole banking sector focuses on the development and improvement of the banking regulatory framework to be in line with the development orientation and strategy of the banking sector and the roadmap for implementing Vietnam‘s international monetary and banking commitments, specifically focusing on completing the drafting of the Law on the State Bank of Vietnam, the Law on Credit Institutions, the Law on Deposit Insurance and the Law on Banking Supervision; and focuses on the research, revision and finalization of the regulations on foreign exchange, security, organizational structure and operations of credit institutions, etc.
- The monetary policies should be closely associated with the objectives to mitigate economic downturns, to contain inflation at a proper rate, stabilize the money market and ensure the safe and sound banking system against the backdrop of instability in the international financial market. To this end, SBV will continue to manage the monetary policy instruments and harmonize the management of exchange and interest rates; enhance the coordination with relevant ministries and agencies to ensure the consistency of macro economic policies, especially between monetary and fiscal policies; improve the effectiveness of statistics and forecasts to be responsive in a timely way to the international and domestic economic and monetary movements; and ensure liquidity of credit institutions.
- Solidly developing and enhancing the operational efficiency of the credit institutions with the aim of maximizing the mobilization of idle capital from the public and effectively allocate these capital resources for production expansion; directing credit institutions to change their credit structure with the focus on production, exports, agricultural and rural development and SMEs; and enhancing the competitiveness of domestic credit institutions.
- Continuing to renovate and improve the banking supervision; improving the legal framework for banking supervision and the prudent banking regulations in combination with strengthening organizational structures and training of banking supervisors.
- Strongly developing banking technology and non-cash payment to offer better banking services for the society.
- Enhancing international cooperation and heightening the role and position of Vietnam in the international financial and monetary community.
- Promoting information and communication on banking operations in order to gain the support of the society for monetary and banking operations and at the same time creating an additional supervision channel from the society on the operations of the banking sector.
By reviewing the obtained achievements, weaknesses and lessons of the banking sector in 2008, we are strongly confident that under the clear-sighted leadership of the Communist Party and the strict guidance of the Government, the Vietnamese banking sector will continue to overcome difficulties and challenges to fulfill its tasks, hence making an active contribution to the implementation of the national socio-economic tasks in 2009.
Mr. Nguyen Van Giau, PhD., Member of the Central Committee of the Communist Party of Vietnam, Governor of the State Bank of Vietnam
SBV
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