The money market is seeing the first signs of loosening though the State Bank of Vietnam has yet to make a decision on reducing benchmark interest rates.
Late last month, the central bank decided to reduce interest rates on treasury bills to 2.75 per cent per year, down 25 basis points after four months of keeping it steady at 3 per cent.
But despite the lower interest rate, all treasury bills were successfully auctioned off with credit institutions buying all of them.
On the inter-bank market, loan interest rates for all terms are down, with the overnight rate falling to 3 per cent from over 4 per cent.
Government bond rates have also dropped by 0.2-0.4 percentage points since the second quarter, but demand for them remains very high.
In late June, a number of banks had their credit growth quotas adjusted upward by 3-4 percentage points with the central bank explaining those lenders have already met Basel II standards.
Notably, most of them have almost reached the full-year credit growth quotas they were allotted.
Another sign of the monetary loosening is that several major banks cut loan interest rates for businesses in priority sectors by 0.5-1 percentage point earlier this month.
Thus, those in agriculture and rural development, supporting industries, IT and small and medium-sized enterprises only pay around 5.5 per cent now.
Why is the central bank loosening monetary policy?
Analysts said many countries have done the same to stimulate slowing growth and lessen the risk of recession caused by the ongoing US-China trade war.
Just on August 7 and 8, several central banks cut basic interest rates, including those of Thailand and the Philippines.
Even the US finally cut its benchmark interest rate after many years on July 31.
This means if Vietnam does not loosen its own monetary policy, it would be at a competitive disadvantage.
There is also a threat of an economic slowdown because of outside influences, and rate cuts are a major weapon for central banks.
The banking sector’s strong performance this year has enabled the rate cuts.
So far this year, many lenders have reported record profits on the back of fee rather than interest income.
For instance, the HCM City Development Joint Stock Commercial Bank, or HDBank, reported a record pre-tax profit of VND2.211 trillion (US$95.36 million) for the first half.
Its revenues rose 17 per cent with income from services rising by 27 per cent.
Foreign direct and portfolio investments have remained strong this year. FDI in the first eight months totalled $24.35 billion, up 4.2 per cent year-on-year, and the central bank’s injection of large amounts of dong to buy the greenback has helped improve the banking sector’s liquidity, thus making lending interest rates cuts easier.
Experts believe the central bank would be able to officially loosen monetary policy by decreasing benchmark interest rates such as the rediscount interest rate and refinance rate soon.
Solar power a hot topic after gridlock
Development of solar power is considered pressing for Vietnam to mitigate its electricity shortage, which is becoming more severe.
According to Vietnam Electricity (EVN), the country will face power severe shortages in the early 2020s.
Its demand for electricity will exceed its supply by 6.6 billion kilowatt hours (kWh) in 2021, increasing to 15 billion kWh by 2023, equivalent to about 5 per cent of demand then.
The country needs 60,000MW of capacity in 2020 and 129,500MW in 2030, meaning it would have to increase by 6,000-7,000MW a year.
Industry insiders said the capacity now is only 47,750MW, and increasing it to 129,500MW within just 12 years would be a big challenge given the slow progress of many power plants due to various reasons.
The country is expected to add 17,000MW of thermal power in the next five years but none of the projects has started yet due to lack of coal and liquefied natural gas.
Thus, the completion of 90 solar power projects in the southern region with a combined capacity of 4,500MW was expected to help ease the power shortage significantly.
But things are not panning out well.
With around 1,600 to 2,700 hours of sunlight per year, the potential for solar energy in Vietnam is 60-100GWH.
To exploit this precious potential, the government issued Decision 11 in 2017 with a range of incentives for the solar power industry.
It set the feed-in-tariff for solar power plants at a high VND2,086 (9.35 cents) per KWh for a period of 20 years.
It offered incentives for installing power lines and substations to connect solar power projects with the power grid and waived or reduced land and water surface lease and land use fees in investment preference areas.
As a result, there was a rush by foreign and local companies to set up solar farms, experts said.
Meanwhile, power transmission and distribution systems did not keep pace, and electric grids quickly became overloaded as the plants began to generate and supply power.
And that is where things stand now.
EVN has been forced to consider measures to reduce the solar power being transmitted to the national grid.
Experts said the Electricity Law stipulates a government monopoly in transmission, meaning the government installs, manages and operates transmission systems.
This regulation is the main hurdle to the development of electricity transmission infrastructure.
The government’s decision also has certain limitations, some pertaining to the power market and others resulting from gaps in the legal framework.
In particular, Decision 11 does not provide for a direct power purchase agreement (PPA) which would have allowed large corporate customers such as industrial parks and manufacturing facilities to buy solar power directly from independent power producers. This model was once considered for wind power, but nothing happened and all power must be distributed through EVN.
Another significant hurdle is the lack of clarity about the ability of investors to invoke a government guarantee for EVN’s obligations as the sole power purchaser.
Analysts said because the country has already exploited nearly all of its hydropower resources, the renewable resources such as wind and solar have become imperative.
While solar energy is widely available, much work needs to be done soon to use it efficiently. Without well-planned investment schemes and operating mechanisms, solar power will merely destabilise the electrical system and could lead to grid collapses.
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