The move to reduce the interest rate of compulsory reserve deposits on the afternoon of August 6, 2020 by the State Bank of Vietnam (SBV) is considered to create the psychological factor, but in the long term, it could take risks.
Before 2020, economic growth in Vietnam was based on both foreign demand and domestic consumption, contributing more than 75 percent of GDP growth in the period of 2016-2019 on the basis of high growth in exports and private consumption.
According to the World Bank (WB), in the near future, those two dynamics are doubtful to immediately return to pre-crisis levels, when foreign demand is still weak. Because of numerous countries in the world was also affected by the Covid-19 epidemic, which slowed down the growth of exports and tourism.
At the same time, the domestic recovery process is questionable to prolong as most businesses and households will still apply prudent investment and consumption plans, especially in the context of complicated epidemics nowadays.
According to economic experts, the return of the second wave of Covid-19 will make credit absorption capacity which is already weak in the first 6 months of the year more difficult to improve. Therefore, there is a high possibility that interest rates will continue to be kept low because the liquidity in the system is quite abundant.
Meanwhile, the capital absorption capacity for production and business activities is limited, the possibility of real estate projects opening up for sale is not high when the government advise to reduce person-to-person contact, which spreads infectious diseases.
Therefore, the recent move to lower the compulsory reserve deposit interest rates of SBV is expected.
Specifically, SBV decided to lower the interest rate for compulsory reserve deposits of credit institutions at SBV: 0.5 percent per year for compulsory reserve deposits in VND (a further reduction of 0.5 percentage points), deposits exceeding compulsory reserves in VND are 0 percent (unchanged). Adjustments take effect from August 6, 2020.
Talking to the Securities Investment News, a senior officer of Vietnam Prosperity Joint-Stock Commercial Bank (VPBank) said that the above move of the SBV mainly created psychology for banks to reduce deposit rates, thereby gaining more room to reduce lending interest rates, support economic recovery.
More specifically, Ta Thu Tin, deputy director of Financial management and treasuary division at Sai Gon Joint Stock Commercial Bank (SCB), said that with the current scale of capital mobilisation activities (as of July, the whole banking system has mobilised about 8.5 quadrillion dong) and the current required reserve ratio (three percent for VND deposits under 12 months and one percent for VND deposits with a term of 12 months or more), the required participants fund deposit at SBV at about 130 trillion dong.
According to Tin, with a 0.5 percentage point reduction, the banking system will be reduced interest income from reserve deposits by 650 billion dong, this decrease is modest compared to the current liquidity scale and not has a great impact on the mobilisation and lending costs of banks, while helping the SBV to reduce corresponding operating costs.
“The lowering of interest rates applied to compulsory reserve deposits has not had a great impact on the banking system and affirms that SBV will continue the direction of reducing the market interest rate level,” said Tin.
Sharing with the Securities Investment News, a senior leader in Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank), Capital management and Financial Planning Department, said that SBV lowered interest rates to ensure compatibility between the interest rate for compulsory reserve deposits and the interbank interest rate because in the past time, the liquidity of the interbank market remained redundant.
“This is a timely move of SBV in accordance with the macroeconomic developments as well as the mobilising interest rate level in the market. Thereby, credit institutions also grasp the orientations and guidelines of SBV to build appropriate mechanisms and policies to reduce capital costs and facilitate continued lowering of lending rates, accompanying businesses, individuals and actively supporting the economy”, he said.
Tran Thi Khanh Hien, Acting director of Analysis Division of VNDirect Securities Company, stated that, unlike the two operating interest rate cuts taking place in the first half of 2020, this time, SBV only reduces interest rates on deposits of compulsory reserves in VND.
Basically, this interest rate does not have much influence on the money supply. In addition, since the beginning of July, there has been a round of actively lowering interest rates from a number of state-owned banks. Therefore, this interest rate reduction did not have a great effect on the credit supply and demand of the market.
According to Hien, the monetary loosening policy will continue until at least 2021 and Vietnam will not be able to go another way in the context that countries around the world loosen monetary policy to support their economy to recover from the pandemic. However, there are two notable risks at this time.
The first risk is controlling inflation in the context of high pork prices. CPI is tending to step back to the four percent in June and July thanks to the government’s drastic measures on price management and control such as pork imports to reduce domestic pressure and reduce electricity prices in the quarter II or control the price of public services.
“This time, the price of pork can be stabilised, in the context that oil prices are unlikely to increase strongly towards the end of the year will basically control inflation. Accordingly, we forecast average inflation this year to be about 3.5%, which means enough room for the application of monetary policy loosening. However, difficulties remain as weather uncertainties such as floods in China and Vietnam will put pressure on pork prices in particular, and food prices in general in the last months of the year,” she said. Hien analysed.
The second risk is credit quality. Listed banks’ NPLs are on an increasing trend in the first half of 2020 as businesses are heavily affected by the epidemic. In addition, the quality of new loans under pressure to boost credit growth is also a matter to note. “Quality risks will be delayed, but negative impacts will last long”, Hien emphasized.
Quach Manh Hao, finance and banking expert, said: “This decision on interest rates shows that SBV does not have numerous options and has used up what it can from its tool inventory. It is more psychological and political than economic. In other words, monetary instruments are no longer working. The government needs to have policies that directly affect consumers and businesses in specific markets. Currently, it is difficult to have a tool that ensures ‘one use for all economies’.
The World Bank’s expert also emphasized in the Update of Vietnam’s economic situation Report announced at the end of July: “The government needs to find ways to stimulate the economy in the next few months, giving no harm to fiscal sustainability and long-term debt sustainability”.
Specifically, the World Bank recommends that the government have to focus on fiscal policy, a traditional tool to stimulate economic recovery in the near future. For Vietnam, more spending is not necessarily better, but should speed up the disbursement of the approved investment budget.
According to the World Bank’s calculations, if the government increases the speed of implementing the approved budget for 2020 from 65 percent to 75%, the ratio of public investment to GDP will increase by 1.5 percentage points, thereby directly pumping about four billion dollars into the economy.
“The State needs to proactively try to support the economic recovery, which means better spending and temporarily using the fiscal space built up over the past three years. Authorities should accelerate the implementation of the investment programme, not only by removing administrative obstacles associated with a number of major projects, but also by encouraging the implementation of public infrastructure at the local level. The government should also wisely support the private sector, especially businesses operating in difficult industries such as transportation, tourism…”, emphasized the World Bank’s report.
