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Increasing or lowering base interest rates - a thorny issue
Is it necessary to continue reducing base interest rates on the Vietnamese dong and will this affect the government’s 4 percent interest rate subsidy package?
According to analysis by various economists, many countries have lowered their interest rates in the current climate of international economic integration. If a developing country does not follow this trend, its economy will be affected.
Fluctuations in interest rates
The director of the Nam Thang Long branch of Vietinbank, Pham Xuan Hoe, said that many commercial banks adjusted their base interest rates tem times in late 2008 and early this year. “The deposit interest rates for a three-month term is sometimes higher than that for a 12-month term while the interest rates for weekly terms are roughly equal to or higher than that for a 12-month term”, Mr Hoe said.
Another difficulty for commercial banks is that input interest rates have decreased slowly because the interest rates for 6-9 and 12 month deposits cannot be adjusted at the moment. In addition, regarding contracts signed with economic organisations, commercial banks cannot adjust interest rates unless they pay for the adjustments.
Mr Hoe added that the situation has led to the NIM (Net Interest Margin) of some branches reaching only 1.5-1.8 percent, which is much lower than the region’s average figure of 3-3.5 percent.
Moreover, the impact of monetary policies and temporary solutions has created adverse precedents in Vietnam. For example, the short-term deposit interest rate is even higher than the long-term one. This is not in accordance with the international norms and also causes more difficulties for commercial banks.
In fact, the small commercial banks now top interest rates. When these banks cannot provide any more liquidity, interest rates will be pushed up, to attract more capital from the big commercial banks.
Dr Nguyen Thi Mui from the Vocational Training and Human Resource Development School of Vietinbank said that the rapid adjustment of base interest rates and the control of ceiling interest rates has had a big impact on business administration of commercial banks.
Considering a reduction in base interest rates
According to some economic experts, the reduction in base interest rates will help the public and enterprises to borrow capital at a lower level while the ceiling interest rate mechanism is still in place. At that time, the interest rates on capital in VND will be reduced accordingly.
Truong Dinh Tuyen, a member of the National Monetary Policy Consulting Council said that if the state bank considered lowering interest rates, it could lead to soaring inflation, which in turn would affect foreign exchange rates and cause difficulties for commercial banks.
“Subsidized loans will be halted by the end of 2009, how can we adjust the interest rates to avoid shocks for banks and businesses?” Mr Tuyen said. “It is essential to choose the right time to reduce interest rates and adjust them to a suitable level”.
Mr Tuyen’s view was shared by Duong Thu Huong, General Director of the Vietnam Banking Association (VNBA), who said that now it is not the right time to reduce the base interest rates and it should stay as it is.
Ms Duong said that if the base interest rate was reduced, the interest rates for Vietnamese Dong would go down. In fact, with the current interest rates, even though commercial banks increased their interest rates, they still could not attract many bank deposits.
She cited efforts by the Vietnam Bank for Trade and Industry in Hanoi to raise capital, saying that the bank’s ability to attract capital fell by 0.36 percent in the first quarter of 2009. “While commercial banks’ interest rates should have been raised to attract more deposits, the possible decrease in base interest rates would have prevented this and made it difficult to implement the Government’s measures to stimulate demand,” she said.
The VNBA has proposed that the Governor of the State Bank of Vietnam maintain the current base interest rate level for the first half of this year at least.
Falling base interest rates may affect exchange rates
In the first quarter of this year, Vietnam’s export surplus reached US$1.6 billion, while its import surplus amounted to US$600 million (lower than last year’s figure). The supply and demand for foreign currency will likely decrease in 2009 due to a reduction in both foreign direct/indirect investment and overseas remittances.
Ms Huong said: “if we continue to cut base interest rates, the interest rates for Vietnam Dong will drop, resulting in a large gap in the exchange rate between the Vietnamese Dong and the US dollar, and as usual, local people will buy more US dollars.”
According to Le Hai Mo, deputy head of the Financial Science Institute, the Vietnamese currency is much weaker than many foreign ones. Although the prestige of the domestic banking system has risen in recent years, the Vietnamese Dong is not strong enough to cope with the knock-on effects from outside markets when its interest rate goes down, he noted.
He raised questions about the unsuccessful release of Government bonds recently and attributed this to investors being wary of the Vietnamese Dong and the level of base interest rates. “This factor demonstrates that we should not reduce interest rates without a detailed strategy,” he added.
Meanwhile, Dr. Nguyen Minh Phong from the Hanoi Economic Research Institute, said that it is impossible to reduce the base interest rates to promote investment and provide businesses with easier access to bank loans. This has to rely on the objectiveness of the market and benefit people with savings. You simply can’t reduce interest rates and attract more bank deposits at the same time.
Mr Phong agreed that a high interest rate can provide more capital for banks. However, this may reduce the effectiveness of the Government’s stimulus package, he said, adding that the Government should use the State budget and stop any discount on interest rates.
“If interest rates continue to fall, the banks will not be able to raise capital and this will affect their ability to provide loans,” warmed Nguyen Dai Lai, a financial analyst from the Credit Information Centre of the State Bank of Vietnam.
vietnamnet,vov
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