A paradox is currently existing in the economy, in which capital is abundant but cannot be injected to the economy.
Banks are worried as having purchased government bonds
The government bond yields are falling to the lowest levels in 10 years. Talking to reporter of Bao Dau tu, Nguyen Tu Anh, deputy director of the Monetary Policy Department under the State Bank of Vietnam (SBV) expressed concern about this fact.
According to Tu Anh, banks are mobilising medium and long-term capital in the market at interest rates of 6-7 percent per annum, while banks lend to the government at only 3-4 percent per annum on a 10-year term.
The downward interest rates means that government bond prices are going up. Comparison of some countries show that the government bond yields of Indonesia are currently above 7 percent per annum (twofold compared to Vietnam’s), while the country is having an equivalent government’s credit rating to Vietnam. If including the Credit Default Swaps (CDS) in the calculation, Vietnam’s government bond yields are even lower than the US’s.
Currently, most of the government bonds are acquired by banks. Thus, the low government bond yields are directly putting pressure on banks.
Specifically, banks for a long time have mainly acquired short-term government bonds (long-term government bonds offer higher yields but the risk is larger), but if they purchase government bonds in this period, they surely will suffer loss. Thus, if the government bond yields continue to decline, banks will have to choose whether to massively sell government bonds, to increase lending rates, or to lower deposit rates.
Of the above options, increasing lending rates or cutting deposit rates are both difficult to be done. Therefore, the most possible option is to sell government bonds. Statistics of the Hanoi Stock Exchange (HNX) showed that instead of being quiet to wait for yield increase, the trading of government bonds has sharply risen in the first three months of 2018, in which repo trading saw very strong growth.
The paradox on current market
Dr Le Xuan Nghia, an economic expert, analysed that abundant capital of banks is the reason lead to the reduction of government bond yields. There are four causes of this situation.
Firstly, since public investment stagnates, the capital from government bond issuance in the previous years has piled up at the State Treasury, seen through the very large deposits of the State Treasury in banks, reaching up to hundreds of trillion dong.
Secondly, the equitisation of State-owned enterprises has brought a huge amount of money to the budget and this source is also deposited in commercial banks.
Thirdly, SBV has raised the foreign currency reserves, which means that a large amount of dong has been injected into the banking system.
Fourthly, SBV limits the lending to deposits ratio of commercial banks at 80 percent, which means that commercial banks have up to 20 percent of abundant capital.
The excessive short-term deposits have led banks to massively acquire government bonds. Meanwhile, since the new issuance is limited (as the government bonds issued in the previous years have not been fully disbursed), the government bond prices thus increase higher.
The National Financial Supervisory Commission said that the liquidity of the banking system in the first three months of 2018 was abundant, but mainly due to the injection of SBV for buying foreign currency and the slow disbursement of government bonds.
In the immediate future, the excessive liquidity is good for banks but it may lead to many consequences for the economy in the future, such as inflation, virtual liquidity and government bond bubbles, etc.
Another paradox is that although the liquidity is abundant, credit grows slowly while mobilisation is higher than last year, many banks are still using many “tactics” to increase deposit rates. This shows that the health of banks is uneven and many of them are still in difficult situation.
In this context, Dr Nghia believed that to reduce the excess of capital, the most important solution is to promote public investment and tighten the deposits of the State Treasury at banks.
In addition, another solution to avoid the unevenness is that SBV should assign appropriate credit growth limit based on the health of each bank. Accordingly, healthy banks may be allowed to use a higher lending to deposits ratio than the current level of 80 percent, on the basis of controlling the overall money supply, in order to support the growth in the context when public investment is slow, and to keep inflation under control.
