Interest rate cuts expected to spur credit growth

2014-11-10 09:22:58

Nhan Dan – The decision to cut key interest rates announced by the central bank last week has been welcomed by economists and commercial bankers as a reasonable move to help remove difficulties for businesses.
  However, some analysts argue that rate cuts alone are not enough for the cheap money to translate into economic activity.

Stimulating credit growth

Commenting on the rate cuts made by the State Bank of Vietnam (SBV), the head of the bank’s Monetary Policy Department, Nguyen Thi Hong, said that since the start of 2014, the SBV has implemented various measures to curb inflation, stabilise the macroeconomy, support growth and ensure liquidity for credit institutions and for the broader economy.

In the first three months of the year, monetary policy helped bring down inflation. The liquidity of the banking system was ensured before and after the Lunar New Year. Interest rates, foreign exchange rates and the monetary market were stabilised, and reserves of foreign currency continued to rise.

Based on these positive developments, the central bank decided to cut a range of key interest rates as a measure to support struggling businesses.

Official data released by the SBV show that as of March 13, the total money supply had risen by 2.96% since the end of 2013. Deposits were up 1.92% and loans had fallen by 1.05%. According to BIDV Senior Executive Vice President Tran Xuan Hoang, the fact that deposit growth was outpacing credit growth means the decision to cut deposit rates was a viable move, which will lay the foundation for reductions in lending rates, thereby creating more new loans.

LienVietPostBank Vice President Nguyen Duc Huong agreed that the cuts had been a reasonable move following reports of economic data from the first quarter of 2014. He added that if inflation remains low, interest rates on short-term deposits will see further reductions. However, Huong stated that monetary policy is one of many instruments used to regulate the economy. In addition to high interest rates, enterprises are currently faced with weak aggregate demand. He said Vietnam needs to ease restrictions on foreign ownership to attract more investment with lower interest rates into the stock market, and to push through public investment. “Issuing Government bonds to mobilise capital for public investment is now the easiest and most effective way. It is a reasonable measure to boost credit growth”, he said.

A report released by HSBC also pointed out that rate cuts would not have a strong impact on loan growth. The bank said the SBV’s move was meant to stimulate credit growth, but that interest rates are no longer obstacles because they have been brought down to reasonable levels and there is now a surplus supply of Vietnamese dong. HSBC said the underlying issue is that bad debt has yet to be effectively resolved. As long as bad debt remains unresolved, banks will still be wary of increasing their lending.

Businesses’ expectations

It came as no surprise when the central bank cut key interest rates. The move had been anticipated and many banks cut their interest rates before the SBV’s official announcement of reductions of one percentage point for short-term deposits and lending rates in five priority sectors: agriculture, export, auxiliary industry, small and medium-sized enterprises and high-tech industry. With these reductions, it is expected that loan rates for other sectors will also be reduced.

The Government hopes that the steel industry will bottom out and record a slight increase of 7% this year, with construction steel rising 3%. According to Chairman Ho Nghia Dung of the Vietnam Steel Association, the reduction of short-term interest rates is good news for steel makers because they usually require a large amount of working capital. After making large investments in fixed assets, many companies have to operate intermittently because of a lack of working capital. However, Dung added that steel producers also have a large demand for long-term investment, so a reduction in long-term rates would facilitate their business further, helping them cut production costs and enhance their competitiveness.

Managing Director Van Duc Muoi of Vissan, a food manufacturer, shared his view that cutting rates is a bold move for the State Bank of Vietnam; it is a move that expresses the bank’s determination to remove obstacles for the business community. Lower lending rates have built businesses’ confidence in the policy of the central bank and other Government agencies, although their impact has not been particularly strong.

Muoi warned that this is far from a silver bullet for enterprises because their main worry, consumer demand, remains far from recovery. Although input costs continue to rise, enterprises cannot and dare not raise the prices of their products and services. Therefore, business leaders remain wary and they make careful considerations before borrowing money to expand their business or update their technology. They borrow moderately, and only those with good business opportunities and regular clients may be willing to borrow. Therefore, the Government should introduce appropriate measures to increase aggregate demand.

DO DUY THAI, General Director of Thep Viet Company
Reducing interest rates on short-term deposits is a positive move that makes it easier for enterprises to access bank loans. However, long-term rates matter more to industrial manufacturers. Currently, the interest rate on long-term loans for industrial manufacturers is too high (10.5% per year) and has not been adjusted for a long time, while rates in other countries hover around 2-3%. This restrains manufacturing growth by undermining the ability of companies to make long-term investments. It also reduces the competitiveness of Vietnamese exporters. The SBV should consider lowering long-term lending rates to around 7% per year to help enterprises overcome this period of economic adversity.

DANG QUOC HUNG, President of Kim Boi Handicraft Company
Our company urgently needs capital to speed up the pace of building new factories, so we are pleased by the news of interest rate cuts. In the past, we had to refrain from borrowing from banks. Nevertheless, the current rates are still not attractive to enterprises: more cuts are needed. For now, input costs are rising continuously, but we cannot increase the prices of our products because if we do so, they will not sell. In addition, many companies are reluctant to borrow because loan terms are usually different from their production cycle, forcing them to pay higher-than-usual interest rates. We suggest that the Government introduce some policies to stabilise the prices of input materials in the long term. In addition, commercial banks need to reconsider their loan offerings to make them more flexible for borrowers