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Don't worry about rapid credit growth, says expert
Dr. Tran Du Lich, a member of the National Monetary and Financial Council, spoke to Thoi bao Kinh te Viet Nam (Vietnam Economic Times) about credit growth and the need to restructure financial markets
Why has credit grown so rapidly?
During 2001-05, the nation's economy bounced back from the serious impact of the regional financial crisis with an average growth rate of 7.5 per cent a year. In those five years, credit grew by about 23-24 per cent per year.
In 2006, the economy grew by 8.3 per cent, while credit rose by 24 per cent.
Then, in 2007, total credit in the nation's banking system suddenly jumped sharply, growing 53.4 per cent while GDP increased by 8.6 per cent. By 2008, growth slowed to 6.4 per cent, but credit continued to expand, increasing by 27.6 per cent. This pattern continued in 2009, when growth slowed further to 5.3 per cent while the credit increased by a whopping 37.3 per cent.
This fluctuation in our credit system, in my opinion, is attributable to three factors.
First, the bubble in the securities and real estate markets during the period from late 2006 to early 2007 seriously impacted the credit market, leading to the formulation of enormous virtual assets, with a huge gap between their financial value and the real asset value.
Meanwhile, a sharp increase in the import surplus in the past three years has led to an increase in the demand for money, i.e., the relationship between commodities and money. But our economy is mostly based on processing, so the ratio of added value to commodities value is low. So even if money demand is high, it does not help increase the GDP. It's been estimated that about 70-80 per cent of the import value of raw materials, equipment and machinery is transferred directly to export value and does not directly contribute to the growth in GDP.
Second, over the last three years, most of the working capital of enterprises has been borrowed from commercial banks. The imbalance between supply and demand for capital was a leading cause for the fierce competition between small commercial banks. It drove the credit market into chaos, and, as a consequence, the Government had to adjust monetary policy more frequently in the hopes of keeping the inflation rate in check.
Commercial banks found themselves in a "one-man market". Commercial bank profits were high, but they poised many risks for the system. They may still undermine the economy in various ways. In that context, coupled with the global economic downturn, investor confidence has been eroded.
Third, higher public spending from both the State budget and State-owned enterprises has attracted a large sum of credit. Many of these enterprises have borrowed from credit organisations and from the State Bank of Viet Nam, and even Government bonds have been largely sold to commercial banks. The money raised from the general public through bond issues has been very small.
Things that have been going on in the last quarter of 2009 and early 2010 have made people worry about rising inflation, exchange rate fluctuations and interest rates. However, in the past two or three weeks, there have been signs of economic recovery, with 2010 growth forecast at 6.5 per cent and single-digit inflation.
We must not be subjective with our financial and monetary policies. What we should do now is to combine situational measures with long-term solutions.
The State Bank has recently focused a lot of efforts on managing the financial markets. How would you rate their efforts?
Financial and monetary policies for 2010 are not only aimed at attaining two key objectives – growth of 6.5 per cent and inflation of no more than 7 per cent – they are aimed at incrementally restructuring our financial markets, an important factor in securing sustainable development and eliminating risk. We hope the restructuring will help restore investor confidence in their long-term investments in Viet Nam.
Meanwhile, we need to overhaul efforts to check the interest-rate wars among commercial banks in order to increase credit while also increasing the amount of capital raised through financial markets.
Does the State Bank of Viet Nam need support from the Government in restructuring the financial markets?
Yes, the State Bank needs support from the Government on how the restructuring process should be conducted and in a thorough study of the country's financial markets since 2006.
The study should focus on the finances of enterprises, particularly State-owned enterprises and how they interact with the State budget. Such a study will help develop financial and monetary policy toward the goal of shifting the burden of supplying medium- and long-term capital from commercial banks to non-banking financial institutions and markets.
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