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Base rate cuts still in the mix
Future base rate cuts are in the pipeline to counter a downward economic spiral.
Over 2009’s first quarter, Vietnam’s gross domestic product (GDP) growth was 3.1 per cent, lower than 5.7 per cent growth in 2008’s fourth quarter and 7.4 per cent during the same period last year. Last year’s GDP growth was 6.2 per cent with the government’s newly proposed target for 2009 being 5 per cent. Two weeks ago, the central bank opted to leave its policy rate steady at 7 per cent for April.
According to Khalil Belhimeur, fixed income strategist at Standard Chartered, with inflation easing for a seventh consecutive month and an economic recovery not expected until at least the second half of this year, there is currently no need to hike rates. “Further monetary easing is, however, still plausible with the interest rate support programme potentially not providing the anticipated boost to economic activity,” said Belhimeur.
In 2009, the Vietnamese government made credit growth a top priority, establishing an initial 20 per cent target for outstanding loan growth in 2009. The first tranche worth $1 billion of the government’s $6 billion fiscal stimulus package has been utilised to make cheap credit available to specific economic sectors, mostly small- and medium-sized enterprises. Specifically, those enterprices have enjoyed a 4 per cent interest rate reduction.
Up to March 26, VND179 trillion ($10 billion) was disbursed via the banking system. However, outstanding loans growth for February was just 0.23 per cent, even lower than 0.52 per cent in January.
“This figure highlights the fact that while gross loans have been surging, the actual net increase has been much smaller. With only loans underwritten after the implementation of the subsidies period for the interest rate support programme, most qualifying companies have opted to refinance their loans to take advantage of the scheme,” said Belhimeur.
In theory, the subsidising of interest rate payments is an effective way of stimulating the credit market. Belhimeur said the way companies have been utilising the support programme did not serve its underlying purpose of promoting economic activity, thus cutting the base rate could be appropriate.
However, the State Bank’s banking development strategy institution head Nguyen Thi Kim Thanh said the authority had no plan to cut rates.
HSBC economist Prakriti Sofat, who has just had meetings with central bank officials, thinks differently.
“From our recent meetings with central bank officials, we got the feeling that the base rate at 7 per cent would probably be the bottom despite weak GDP numbers no doubt increasing the pressure on the bank to do more. Immense policy stimulus has already been thrown at the economy,” said Sofat.
Since the fourth quarter of 2008, the base rate has been cut by 7 per cent reducing the cap on lending rates from 21 to 10.5 per cent. In Vietnam, lenders are allowed to mobilise and lend at rate within 1.5 times of the State Bank’s base rate.
Additionally, the cash reserve ratio has been cut by 8 per cent to 3 per cent which means banks must deposit VND3 at the central bank for each VND100 mobilised. “Take this together with the regional trade recovery that we expect in the second half of the year the country could easily clock growth of above 6 per cent by the year-end.
“However, officials did indicate that they will continue to use other tools available to them to support liquidity, so further easing in the cash reserve ratio may be forthcoming,” said Sofat.
VietNamNet, VIR
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