Economic policy experts spoke with Viet Nam News reporters Hong Minh and Quynh Anh about the State Bank of Viet Nam's decision last week to lower the cap on deposit interest rates from 14 per cent to 13 per cent and the move's possible impacts on the economy.
Is an interest rate cut the right move in the current economic situation?
Nguyen Van Binh, Governor of State Bank of Viet Nam:
I think now is the right time for such a move: we have both the necessary and sufficient conditions – which are a steady downward trend of inflation and much better liquidity in the banking system.
|Nguyen Van Binh
Although inflation started to slow down last August, we delayed the rate cut until now when the bank liquidity had improved significantly. After years of red-hot economic growth, the coefficient of capital utilisation of credit organisations and banks has climbed. Some 80 per cent of deposits were short-term while 40 per cent of outstanding loans were medium- and long-term. So difficulties accumulated for years in bank liquidity but the situation is much better now.
Masato Miyazaki, International Monetary Fund mission chief for Viet Nam:
Monetary policy needs to be adjusted if inflation goes down or the economy proves weaker than expected. Thus the question here should be about the timing and evidence rather than whether we should take this action or not. The rate cut itself can be justified because we project a steady downward trajectory in inflation. However, we would prefer to see a slightly delayed action.
Inflationary expectations have been falling even with the recent rise in fuel prices. Typically, if you have doubts over future inflation, that will appear on physical exchange rate markets, but the foreign exchange rate has been very stable. In addition, if people believe inflation will go up again, then there will be changes in the long-term interest rate and more typically in Government bond yields, but we haven't seen these kinds of changes yet.
Cao Sy Kiem, chairman of Small- and Medium-Sized Enterprises Association, member of the National Advisory Council for Financial and Monetary Policy:
This long-awaited rate cut is encouraging news for the business community. Enterprises have been in dire financial straits, so if we didn't give them a helping hand in a timely manner, the whole system would collapse and the damage could be irreversible. The cost of rebuilding the system from the rubble would be too high. Not to mention that, when enterprises are in limbo, they stop paying taxes, so public debt goes up – and we absolutely don't want to become an Asian version of Greece or Spain. So the interest rate cut will help stablise the economy in that sense.
|Cao Sy Kiem
Productivity has stagnated for a long period largely due to the lack of capital, making an interest rate cut to help enterprises access credit imperative. We have mulled over lowering the rate for a while yet have not been able to put it into practice until now. But it's just the beginning and more still needs to be done for enterprises to actually be able to get credit and resume or boost production. This requires commercial banks, enterprises and the central bank to act more responsibly. For instance, commercial banks need to screen their customers in order to make loans selectively to enterprises which can generate jobs and create demand. There are some concerns that even if the deposit interest rate has been cut, profit-driven commercial banks may still not adjust their lending interest rates accordingly. But I don't think so, since commercial banks make profits from lending and if rates are too exorbitant for enterprises to borrow, it's the banks that are also hurt. In such times, the regulatory function of the central bank is all the more important since they should know when to kick in if needed.
Binh: The Ministry of Finance has confirmed that, even with the recent 10-per-cent increase in petrol prices, the impact on the year's inflation will be just 0.64 per cent. The price hike will not have that big of an impact on inflation.
Inflation in Viet Nam is driven by three factors: monetary and fiscal policy, global prices of goods, and domestic prices of goods. These factors depend on exchange rates and the monitoring of domestic prices, mostly food prices. The domestic food supply is therefore monitored to meet demand.
If inflation rate doesn't increase over the next month or two, the interest rate will not be changed. But if the inflation rate goes up and affects the Government's target of keeping the year's inflation under 10 per cent, the State Bank will then have to consider increasing the interest rate.
Miyazaki: Growth this year will probably be slower than last year, but the Government is pressing for structural reforms of the banking system and State-owned enterprises and in public investment, so it's very important that we support such efforts by your Government. Even if the deposit interest rate is cut by one percentage point, that doesn't necessarily mean you can get loans. Borrowers also first need to have good business plans. More importantly, the banks need to have capacity to lend, and the banking sector, especially smaller, weaker banks, may not have that capacity.
What other tools can be used to control inflation?
Kiem: We expect the interest rate to continue to go down so enterprises can benefit, however it is irrational to ask the commercial banks to lower the rate if inflation keeps rising. So the question boils down to how to curb inflation effectively. There is a common misunderstanding among the public that the rising price of goods is the main factor, but this is in fact not true. As we have deeply integrated into the international economy, the prices of goods track those on the global market. Even it means a higher price floor is being set, we still have to accept that, rather than rely on Government subsidies.
While the prices of goods therefore depend on external factors, there are many areas under our full control that we can work on. We have to reduce the trade deficit, the State budget deficit and bad debt as well as increase the incremental capital-output ratio with public investment. Remember, monetary policy is only one element of the economy along with fiscal policy, credit policy and investment policy. Inflation can only be effectively controlled when every element of the economy is adjusted in a comprehensive manner. Interest rate adjustments are just a small step.
Miyazaki: A recent IMF study shows that inflation and real interest rates have a strong relationship. And we believe that inflation can be controlled effectively through the central bank's rate moves. One of our recommendations in the medium term is for Viet Nam to establish an interest rate corridor because it would help make interest rate policy more stable and predictable.
In layman's terms, an interest rate corridor is an instrument that can be used by the State Bank to guide the market into a narrow band of desirable interest rates. What they are doing now is use the repo rate to provide liquidity in the banking system. A corridor means they introduce an interest rate to get money out of the system. More simply, when banks want to deposit money at the central bank, they may get such a certain interest rate. Yet at the moment this doesn't exist
Nguyen Xuan Thanh, associate director for policy research, Fulbright Economics Teaching Programme:
Alongside the restructuring of the financial sector, the State Bank should eliminate the ceiling deposit rate. When the rate is controlled, this market signal disappears, meaning that we can't know if the rate is a balanced one or not. When there is no ceiling deposit rate, or when we can observe the market under an uncontrolled interest rate, we can know exactly the liquidity in the market. But that's not what is happening now.
|Nguyen Xuan Thanh
The Government's target in 2012 is to lower the inflation rate to under 10 per cent. If we can achieve that target, the deposit rate can fall to somewhere around 12 per cent and lending rates to 14-15 per cent. To really liberate the interest rate, inflation should be at 4-5 per cent. And that rate is also the necessary condition to establish a corridor for the interbank offered rate as the IMF suggests. In order to do it, we must have an active interbank market. As a result, such a corridor will be a medium- or long-term target. In 2013-14, when the economy is stabilised, we can start thinking about such a corridor, but definitely not this year. — VNS