Dec 26, 2009
2010: Flexible Monetary Policy Is The Way To Go
VNBusinessNews.com - Financial experts contend that the dollar supply and demand and the benchmark interest rate are the main issues concerning Vietnam’s banking sector in 2009 and in the future.
The economy is still saddled with shortcomings. The propensity to hold on to dollars has hampered imports and exports, not to mention the difficulty in mobilizing and borrowing capital. Besides, experts maintain that over-optimism in the stock market, dwindling export markets and shrinking FDI have exerted enormous pressures on the money market in 2009.
Nguyen Van Giau, governor of the State Bank of Vietnam (SBV), says that Vietnam’s stimulus package has received praise from other countries and helped enterprises slash borrowing costs, maintain production and empoyment, curtail the economic downturn and ensure social security.
However, due to the Government subsidy, interest rates have dropped, fueling credit growth and exerting an upward pressure on interest and exchange rates.
In addition, the financial and economic turmoil has inflicted damage on Vietnam’s economy in 2009. SBV has recently widened the trading band for the U.S. dollar/Vietnamese dong exchange rate at commercial banks from 3% to 5% and managed the interbank exchange rate in line with market signals to boost exports and reduce the trade deficit.
The interest rate in the interbank market aims to enhance short-term liquidity in the banking sector. Therefore, when the interbank interest rate was near the maximum lending rate of 10.5% per annum, the interest rate disparity in this sector was not significant. This is an indication of the constraints facing the money market.
Nguyen Ngoc Bao, head of the Monetary Policy Department from SBV, says that when the stimulus package, aimed at curbing the economic downturn, was launched in early 2009, SBV planned to maintain the base rate at 7% until late 2009. In other words, lending rates would not exceed 10.5% per annum.
However, Vietnam has an open economy which is prone to external influence. Since mid-November, the stimulus package, while effective, has led to side effects such as excessive credit expansion, high exchange rates and unfavorable market sentiments. The prices of gold and some basic commodities have been on the rise, spelling trouble for the domestic money market.
In response, SBV has revised interest and exchange rates upward. After 10 months of stability, the annual benchmark interest rate has increased from 7% to 8% since December 1, the refinancing rate from 7% to 8% and the rediscount rate from 5% to 6%. On November 26, SBV increased the interbank exchange rate by 5% and narrowed the trading band for U.S. dollar/dong to 3% from 5%.
In addition, the Ministry of Industry and Trade will revise taxation policies to reduce imports of non-essential commodities, which may affect the trade balance. The Prime Minister has asked some exporters to sell foreign currencies to banks. These measures will be adopted simultaneously. A weak dong will boost exports and, to some extent, narrow the trade deficit.
The base rate hike shows that the economy has recovered somewhat and enterprises are capable of absorbing capital rapidly. Consequently, dong loans are in short supply. The rate hike helps commercial banks increase deposit interest rates to stabilize liquidity. After all, in the first 11 months, credit grew by 34.5% while capital mobilization rose by merely 26%.
The rise of the U.S. dollar on the interbank market and the narrower trading band will benefit exporters as their commodities have become more competitive. However, enterprises with foreign debt must set aside provisions against risks, so their profits will fall. If the dong depreciates moderately, exports will rise while the incentive to stockpile dollars will fall, Bao remarks.
Bao adds that the Government did not intervene when the exchange rate shot to VND19,000/US$. However, in view of the latest circumstance, it has decided to adjust monetary policy, reduce the trading band to 3% from 5% and increase the interbank rate to 5.44%. In other words, the dong has slid by 3.44% and the maximum exchange rate is VND18,500/US$.
Therefore, policy changes in late November are consistent with Vietnam’s aim to implement a flexible, realistic monetary policy. The ultimate goals are to stabilize the macro-economy, control inflation, foster sustainable growth in 2010 and respond effectively to adverse shocks in the world.
Flexible policy to continue
At an online Q&A session on VNEconomy, Nguyen Ngoc Bao said that in 2010, the National Assembly and the Government want to achieve gross domestic product growth of 6.5%, keep inflation below 7%, ensure macroeconomic stability and maintain social security. Besides, the global economy is expected to abound in challenges and opportunities for Vietnam.
Therefore, in 2010, SBV will implement an active, flexible and prudent monetary policy to attain Vietnam’s socio-economic goals.
Interest and forex rates will be fairly stable and help realize the aforementioned goals. The interest rate policy will strike a balance among the benefits for depositors, lenders and commercial banks, so that immense financial resources, from domestic and foreign sources, will be mobilized and channeled into the most productive use.
The forex rate will be adjusted appropriately in response to inflation, as well as forex supply and demand, to facilitate exports, control the trade deficit, lure foreign investment and keep inflation in check, Bao says.
2010: Flexible Monetary Policy Is The Way To Go
VNBusinessNews.com - Financial experts contend that the dollar supply and demand and the benchmark interest rate are the main issues concerning Vietnam’s banking sector in 2009 and in the future.
The economy is still saddled with shortcomings. The propensity to hold on to dollars has hampered imports and exports, not to mention the difficulty in mobilizing and borrowing capital. Besides, experts maintain that over-optimism in the stock market, dwindling export markets and shrinking FDI have exerted enormous pressures on the money market in 2009.
Nguyen Van Giau, governor of the State Bank of Vietnam (SBV), says that Vietnam’s stimulus package has received praise from other countries and helped enterprises slash borrowing costs, maintain production and empoyment, curtail the economic downturn and ensure social security.
However, due to the Government subsidy, interest rates have dropped, fueling credit growth and exerting an upward pressure on interest and exchange rates.
In addition, the financial and economic turmoil has inflicted damage on Vietnam’s economy in 2009. SBV has recently widened the trading band for the U.S. dollar/Vietnamese dong exchange rate at commercial banks from 3% to 5% and managed the interbank exchange rate in line with market signals to boost exports and reduce the trade deficit.
The interest rate in the interbank market aims to enhance short-term liquidity in the banking sector. Therefore, when the interbank interest rate was near the maximum lending rate of 10.5% per annum, the interest rate disparity in this sector was not significant. This is an indication of the constraints facing the money market.
Nguyen Ngoc Bao, head of the Monetary Policy Department from SBV, says that when the stimulus package, aimed at curbing the economic downturn, was launched in early 2009, SBV planned to maintain the base rate at 7% until late 2009. In other words, lending rates would not exceed 10.5% per annum.
However, Vietnam has an open economy which is prone to external influence. Since mid-November, the stimulus package, while effective, has led to side effects such as excessive credit expansion, high exchange rates and unfavorable market sentiments. The prices of gold and some basic commodities have been on the rise, spelling trouble for the domestic money market.
In response, SBV has revised interest and exchange rates upward. After 10 months of stability, the annual benchmark interest rate has increased from 7% to 8% since December 1, the refinancing rate from 7% to 8% and the rediscount rate from 5% to 6%. On November 26, SBV increased the interbank exchange rate by 5% and narrowed the trading band for U.S. dollar/dong to 3% from 5%.
In addition, the Ministry of Industry and Trade will revise taxation policies to reduce imports of non-essential commodities, which may affect the trade balance. The Prime Minister has asked some exporters to sell foreign currencies to banks. These measures will be adopted simultaneously. A weak dong will boost exports and, to some extent, narrow the trade deficit.
The base rate hike shows that the economy has recovered somewhat and enterprises are capable of absorbing capital rapidly. Consequently, dong loans are in short supply. The rate hike helps commercial banks increase deposit interest rates to stabilize liquidity. After all, in the first 11 months, credit grew by 34.5% while capital mobilization rose by merely 26%.
The rise of the U.S. dollar on the interbank market and the narrower trading band will benefit exporters as their commodities have become more competitive. However, enterprises with foreign debt must set aside provisions against risks, so their profits will fall. If the dong depreciates moderately, exports will rise while the incentive to stockpile dollars will fall, Bao remarks.
Bao adds that the Government did not intervene when the exchange rate shot to VND19,000/US$. However, in view of the latest circumstance, it has decided to adjust monetary policy, reduce the trading band to 3% from 5% and increase the interbank rate to 5.44%. In other words, the dong has slid by 3.44% and the maximum exchange rate is VND18,500/US$.
Therefore, policy changes in late November are consistent with Vietnam’s aim to implement a flexible, realistic monetary policy. The ultimate goals are to stabilize the macro-economy, control inflation, foster sustainable growth in 2010 and respond effectively to adverse shocks in the world.
Flexible policy to continue
At an online Q&A session on VNEconomy, Nguyen Ngoc Bao said that in 2010, the National Assembly and the Government want to achieve gross domestic product growth of 6.5%, keep inflation below 7%, ensure macroeconomic stability and maintain social security. Besides, the global economy is expected to abound in challenges and opportunities for Vietnam.
Therefore, in 2010, SBV will implement an active, flexible and prudent monetary policy to attain Vietnam’s socio-economic goals.
Interest and forex rates will be fairly stable and help realize the aforementioned goals. The interest rate policy will strike a balance among the benefits for depositors, lenders and commercial banks, so that immense financial resources, from domestic and foreign sources, will be mobilized and channeled into the most productive use.
The forex rate will be adjusted appropriately in response to inflation, as well as forex supply and demand, to facilitate exports, control the trade deficit, lure foreign investment and keep inflation in check, Bao says.
