Monetary policy and inflation risk
19-FEB-2008 Intellasia | 16/Feb/2008 Dau Tu Chung Khoan
Feb 19, 2008 - 7:08:00 AM
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The last time has witnessed various changes in Vietnam's finance and stock market. The central focuses are unstable trend of the stock market, impacts of Instruction 03 on liquidity and psychology of the market and the central bank's recently-issued Decision 03 and raising the dong interest rate.
The following article will mention on the central bank with monetary policy and its impact on inflation control.
Based on development directions in Vietnam as well as countries in the world, the stock market, part of the capital market is a strong capital supply channel and the most important of the economy. Accordingly, by 2010, Vietnam's stock market will has total capitalization of 50% of GDP. Thus, building monetary policy based on the stock market in Vietnam is absolutely reasonable. However, regarding functions, the central bank has the top task is stabilising prices, controlling inflation. In terms of economics, this is the pre-condition for healthy and sustainable development of the economy. However, over the last time, the escalating prices, inflation threats with different reasons, what is the central bank's role?
As far as we know, under Instruction 03, the central bank plays a direct management role by limiting securities loans at 3% of total outstanding loans of a bank. However, according to Decision 03, which is revised from Instruction 03, the central bank will conduct a direct management role when limiting securities loans at 20% or less of chartered capital of a bank.
Some experts said that Decision 03 is in fact aimed to limit disposable loans, which is even worse than Instruction 03, disappointing investors accordingly. How investors respond to Decision will be demonstrated in the upcoming time.
Indeed, Decision 03 is designed around chartered capital and accompanied with risk control indexes. The simplest answer is that banks will increase chartered capital in order to adjust securities lending amount. Raising chartered capital will naturally happen immediately however will surely happen for two reasons. Firstly, securities lending services is in general untapped fertilized land. Secondly, in a bid to fulfil development and competition targets within the framework of the world's economic integration, banks have no way but to enforce their strength by one of the basic ways, namely increasing chartered capital.
Thus, in medium and long terms, banks will be able to establish securities lending ratio as they expect. Such a move is absolutely practical and will happen.
At that time, banks will have robust strength with a wide operation network, surely accompanied with huge deposits and outstanding loans.
Therefore, with such a tendency, banks will surely offer loans whereby there will be a big inflow of dong into the market and the economy. With large sum of dong in circulation, there will be a significant pressure on inflation control.
In addition to the statutes regulating securities lending activities, the central bank has boosted all dong interest rates at the same time.
The central bank plans to control money in circulation by hiking interest rates, the most orthodox mean, which, however, will have adverse impacts for two reasons. Firstly, as for loans, due to high demand for production, business and development, businesses still continue needing capital from different sources. Even, with high interest rates of dong, businesses still borrow dong or switch to hold US dollars. This runs against the policy on curbing dolarisation.
Secondly, as for deposits, in fact, real profit from deposits has long been very low, or even negative. Meanwhile, other investment channels remain open.
It can see that hiking interest rates is aimed to deal with money surplus in the future, which will cause many difficulties for the present time.
Even, the central bank's raising interest rates is to push value of dong, helping gain more profit from the forex rate in international trade [imports]. However this will be accompanied with too big cost, that is inflation.
In 2007, the central bank acquired huge amount of foreign currency worth billions of US dollars. That means large sum of dong no longer is in hand of the central bank but is injected into the market in different forms.
Early 2007, the stock market boomed amidst Vietnam's relatively high economic growth. The economy witnessed strong growth of domestic and foreign investment capital inflows.
Over the last time, prices continued growing. It is expected that prices will stay at high levels in the upcoming time.
Additionally, it is estimated that budget deficit is expected to hit 67 trillion dong this year.
It can be confirmed that together with factors of 2007, the year 2008 is facing up a capacity of uncontrollable inflation.
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