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Stimulus leaves big questions unanswered
Three major questions remain unanswered since the Government’s second stimulus package was announced earlier this month.
They are: How much will it total? From where will the money to finance it be drawn? And how will the subsidised loans it provides be managed?
The package is not expected to quickly eliminate the difficulties besetting the economy, but it is expected to reduce the damage to idle manufacturers, businesses, projects, the unemployed and those without social insurance.
Disbursement of the first stimulus package of VND17 trillion (US$960.45 million) began in February and is projected to inject VND420 trillion ($23.73 billion) into the economy this year.
About VND218.42 trillion ($12.34 billion) of this was pumped into the economy by last Friday with another VND112 trillion ($11.41 billion) to be available by year’s end.
Meantime, credit institutions, enterprises and individuals have been told to prepare for the second package.
State Bank of Viet Nam Monetary Policy Department director Nguyen Ngoc Bao told Viet Nam News: "In principle, the volume of the subsidised loans will be greater.
"It will depend on the Government’s budget," he said, refusing to provide a figure.
Short-term, new finance to fund the second package was unlikely to be available.
But Ministry of Finance’s Banks and Financial Institutions Department director Ngo Tuan explained: "The Government and the ministry has agreed that for the foreseeable future, capital to finance the second package will be drawn from the VND17 trillion fund of the first stimulus package."
The director conceded that VND17 trillion was not enough to finance both packages simultaneously.
"When the fund evaporates, we will mobilise more idle capital. The ministry will ensure supply matches demand but much depends on the velocity of disbursement."
Preparation lacking
Research Director of Fulbrigth School, HCM City Vu Thanh Tu Anh said: "The Government’s second stimulus package is essential but it seems to have been an interim response without much preparation.
Where to find the money in a recession is definitely a major concern for the Government. It does not have many choices.
In principle, these include the issuing of domestic and sovereign bonds; raising foreign loans and borrowing from the State budget or printing money.
The issue of domestic G-bonds as well as sovereign bonds should be the first choice.
National Monetary Policy Consulting Council member Cao Sy Kiem said: "Funds for the second stimulus package might be raised from the sale of Government bonds in Vietnamese dong."
But the latest G-bond dong sale was not successful, mostly because of lower-than-expected yield.
The ministry set a limit of about 7.5 per cent, almost the same interest paid for dong bank deposits although traders asked for 8-8.2 per cent.
"If we want a more successful bond issue, the yield should be raised," said Kiem.
"I think the policy-makers should not to be too strict about keeping the bond yield at 7.5 per cent or raising it to 8 per cent," he said
"We’re still working on bond yields," responded the finance ministry’s Ngo Tuan. "We need to consider many factors."
"Time is of the essence," said Fulbright School, HCM City, research director Anh.
"We really need money so we have to accept something. If the chance is lost, even more money will be useless."
But to what height can a bond yield go when the central bank has just trimmed its refinancing rate from 8 to 7 per cent and its discount rate – the rate at which banks borrow for their reserves – from 6 to 5 per cent?
And it’s possible the prime rate will be reduced to less than 7 per cent.
The reduction will lower the cost of borrowing dong but if the Government offers bond yields higher than the interest for dong deposits, the issue will be deemed to have failed.
What about sovereign bonds or foreign loans?
The global economic contraction is likely to mean capital to buy sovereign bonds or lend Viet Nam money is in short supply.
"Creditors will ask rather high bond yield or lending interest rate," an anonymous HCM City private bank executive said.
So is there sufficient money in the State budget to finance the second package?
The deficit is likely to total $8-10 billion this year.
The Government plans to allow the State budget over-spending to total 8 per cent of Gross Domestic Product this year against the 4.82 per cent set by the National Assembly.
Star Project economist Susan Adams told a National Assembly Economic Commission conference in northern Hai Duong Province last week that Viet Nam’s budget deficit for 2009 to 2011 was likely to be a worrying – 7.3, – 7.1 and – 5.5 per cent of GDP.
The current account deficit would be – 9,–9.6 and – 8.4 per cent.
The law forbids the central bank to print money to finance the State budget deficit.
Central Institute for Economic Management International Integration Studies and Trade Policies director Vo Tri Thanh said: "The Government must be very careful about any measures to raise funds, or we may face risks of macro economic instability and inflation."
Credit the cure?
But if the Government raises the money will it cure the economic contraction?
In theory, cheaper credit should help enterprises reduce prices and improve their competitiveness.
Rises in the Consumer Price Index tend to show otherwise.
And if the more than VND218.42 trillion ($12.34 billion) of subsidised loans disbursed so far were used for production, the total number of outstanding loans should have increased by 16-18 per cent instead of the 2.67 per cent the central bank reports.
Research director Anh was worried that most of the subsidised loans were used to extinguish debt although the State Bank of Viet Nam did not confirm this.
If recipients of cheap credit do the same with money from the second stimulus package, the economy will not be helped.
HCM City Economic Research Institute Director Tran Du Lich said: "Strict supervision and inspection will be necessary to ensure the subsidised loans are used effectively."
Ensuring that eligible small-to-medium-sized enterprises receive cheap credit was no less important.
Without post-lending supervision, the subsidised loans might spark corruption, toxic debt in the banking system or even macro-economic instability, the director said.
More needed
"Many enterprises say that even lower interest rates would not entice them to borrow," Ha Noi Trade and Industry Association chairman Vu Duy Thai told Viet Nam News.
"What to produce, who to sell to, where to get contracts... are exercising the minds of entrepreneurs," he said.
As the World Bank warned in a report published last week: "Cheap bank credit and loan guarantees can offset the fall in demand due to drying up of trade finance.
"But cheap bank credit will not encourage firms to produce if they do not have demand for their products."
VietNamNet, VNS
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