According to the National Financial Supervisory Commission (NFSC), liquidity of the banking sector was stable in Q1/2018. The reason was because of the State Bank of Vietnam (SBV)’s increased foreign currency purchase and the slow disbursement of government bond capital. Specifically, at the end of Q1, the Loan to Deposit (LDR) ratio was 88.2 percent (compared to 87.8 percent at the end of 2017).
The continuous abundance of banking sector’s liquidity has supported the recent deposit rate reduction of banks. Besides, the State Bank has continuously net withdrawn dong after the Lunar New Year but this withdrawal was still lower than the injection before the Lunar New Year via foreign currency purchase channel since the beginning of the year and has supported liquidity for banks on Lunar NewYear occasion via open market. Specifically, the State Bank issued T-bills to withdraw 80 trillion dong.
Another noticeable development is that the interest rates on the interbank market have fallen down. Specifically, at the end of Q1, overnight interest rate was 0.83 percent/annum (down 0.47 percent from the end of 2017), one-week interest rate was 0.98 percent/annum, and one-month interest rate was 1.73 percent/annum (down 0.9 percent and 1.2 percent from the end of 2017).
Besides, interest rates for deposits mobilised from the people and businesses were relatively stable. The deposit rate in dong for 12-month term was popularly 6.5 percent-7.5 percent/annum; the average deposit rate for 12-month term was 6.81 percent/annum, up 0.02 percent from the end of 2017. Lending rates for normal production and business sectors were 6.8-9 percent/annum for short term and 9.3-11 percent/annum for medium and long terms.
At the meeting on implementation of banking sector’s tasks in 2018, the State Bank Governor directed the sector to strive to reduce lending rates to support businesses and the economy following the direction of the prime minister and the government.
Accordingly, based on macro-economic developments, monetary market, foreign currency market, the State Bank will consider adjusting flexibly interest rates on the Open Market Operation (OMO) to support credit organisations lower lending rates at the right time and “dose”. At the same time, the State Bank asked credit organisations to join in, demonstrating efforts to lower lending rates.
State Bank deputy Governor Nguyen Thi Hong said “In 2018, the State Bank shall continue regulating interest rates in line with macro situation, and developments of inflation and monetary market. In the context that inflation is controlled at lower level than the target, the market is stable, the macroeconomic is favourable, the State Bank regulates monetary policy tools to support credit organisation have favourable conditions to carry out measures to reduce lending rates, on the basis of ensuring safe and sound financial operations”.
In the context that sufficient conditions such as abundant liquidity, relatively stable interest rates, and market participants are questioning about whether lending rates will decrease?
Dr Can Van Luc, economic expert said there are four reasons why the interest rate reduction is not simple.
First, in line with the world trend, interest rates are rising in many countries such as the U.S, and European countries. This development comes after these countries ended the monetary easing period, and are currently tightening due to concerns about inflation.
Interest rate increasing trend is very clear. It is expected that the US dollar interest rate may increase 0.75-1 percent/annum, which will of course boost the interest rates of US dollar and other foreign currencies, making it more difficult to lower interest rates.
Second, inflationary pressures in 2018 is higher than 2017 because of basic commodity prices, especially oil price, are expected to increase again. Since the beginning of this year, oil price has increased 7-8 percent. In addition, the Middle East crisis is more intense, causing oil price to climb.
Besides, Vietnam continues to raise the price of basic commodities such as power price to increase by 6.08 percent at the end of last year, basic salary to swell from July 1, and social insurance will keep going up. Some provinces will complete raising the price of medical services this year.
That is not to mention, the money supply to the economy last year as well as 2018 will be relatively large in all three channels including credit, private investment and foreign investment. Positive impact from the stock market will help the people spend more comfortably. The pressure of increased inflation makes it difficult to reduce both input and output interest rates.
Third, Vietnam’s input-output interest rate net difference is just at lower-middle level compared to the region, just 2.8-3 percent. This figure is about 3.5-4 percent in Indonesia, China, Malaysia and Singapore.
Fourth, the bad debt settlement process has been furthered, but will not be able to complete overnight.
“Too low bank interest rates will lead to the shift of money flows. I believe that stabilising this year’s interest rates like year will be very good”, said Dr Luc.
Luc added that one important point is that current interest rates are no longer a bottleneck for business system, as interest rates have reduced about 55 percent from the peak period. The credit growth of 18 percent in 2017 is a clear evidence for this.
In fact, the bottleneck of the business is lying in unofficial costs. According to information from VCCI, the survey result about PIC 2017 shows that the business environment is having dark points such as low transparency, legal institutions, bad dispute settlement system for businesses, unqualified human resource quality.
Especially, in 2017, on average, more than 59 percent of businesses said that they still have unofficial costs to pay, though this index decreased from the previous years, 28 percent of businesses are not satisfied with work solving results of civil servants.
Dr Nguyen Tri Hieu, an economic expert, further analysed, medium and long term credit tend to increase gain in the first months of 2018, hindering the interest rate reduction. Specifically, in Q1/2018, medium and long term credit rose 4.3 percent while short-term credit improved 2.6 percent.
“The banking system mainly mobilised short-term capital for long term loans, and the liquidity in long term is not available. The medium and long term capital sources cannot rely on the monetary market but on capital market. However, in fact, the capital source of Vietnam banking system has to meet demands for both medium and long term credit”.
If medium and long term credit increases, banks will not be able to ensure liquidity, and are forced to raise deposit rates. Therefore, opportunities to lower interest rates in 2018 are very difficult”, said Dr Hieu.
