Credit loosening will ‘spark’ inflation

23-Jul-2016 Intellasia | Bao Dau Tu | 6:00 AM Print This Post

Credit growth this year is likely to reach 20 percent, higher than last year’s figure 18 percent. Besides credit growth, activities of easing currency from State Bank of Vietnam (SBV) have raised concerns that strong money pumping may cause inflation.

Statistics from SBV showed, until June 24 2016, the economy credit increased 6.82 percent compared to that at the end of 2015. With this growth rate, the growth rate of credit for the whole year will reach 20 percent, for the first 6 months of 2015, credit increased only 6.3 percent, but it reached 18 percent at the end of 2015. According to information of the Investment Newspaper reporters, many commercial banks have increased credit, also hit target of the year and is asking SBV to loosen credit growth target.

What experts concern is that in the current context, monetary easing, strong capital pumping into the economy can “elevate” inflation again. Economic expert, Dr Luu Bich Ho recommends, SBV must consider whether “loosening” of credit growth from 18 percent to 20 percent is good or not, avoid chasing hot growth.

Agreeing with this view, Dr Nguyen Duc Thanh, director of the Vietnam Institute of Economic Policy and Research (VEPR) said that the tendency to expand monetary policy becomes clearer, the monetary volume significantly increased in the first 6 months of this year. Money supply (M2) increased by 8.07 percent compared to the end of 2015, higher than the same period two years ago. SBV was aggressive in buying foreign currencies to increase foreign exchange reserve, open market operations (OMO) and bills channel was quite lively in the second quarter. According to data compiled by Bao Viet Securities JSC, SBV injected a net worth of 32,000 billion dong through OMO and 25,700 billion dong through bill channel outside the market. These suggest the first steps of easing compared with the previous period.

According to the expert, in theory, boosting credit growth could entail economic growth, but in the present context, credit increase is not necessarily efficient, but it also can put pressure on inflation. “If there are uncertainties in the economy, cash flow can then flow into the asset markets such as stocks, real estate, gold, foreign currency… and not into business production. The government should tighten more monetary and fiscal policy to avoid putting pressure on inflation, thereby creating unstable germs “, Dr Thanh recommended.

An undeniable fact is, the amount of money pumped into the economy through banking channel was strengthened 2 years ago. However, the absorptive capacity of the economy has been worse. Specifically, capital mobilisation growth higher than credit growth in the first 6 months of this year, which shows the trend of the business, people turn to save rather than invest. In this context, if SBV tries to inject capital at all costs, it is likely that the amount of capital will flow into the hollow area of public investment – the capital is less efficient – or high-risk projects such as transport, real estate.

In this case, many said that, SBV will not aggressively ease monetary further in the near future. According to the research expert by HSBC, inflation is likely to reach 4.9 percent this year and rising sharply in 2017 will limit SVB’s possibility of doing this.

On the other side, there are also many comments that SBV should not rush to worry to tighten monetary policy. The lesson of the “brake” of credit in previous years has brought painful consequences, causing the economy stagnated for many years, thousands of businesses closed. “The SBV should not rush to tighten credit negatively, including in sensitive sectors such as real estate,” Dr Le Xuan Nghia warned.

According to this line of thinking is, though inflation risk may increase, but remains low. Moreover, inflation pressures come primarily from commodity prices, not from money supply in the near future. The increase in money supply for the manufacturing sector – real business, especially the five prioritised areas will create momentum for sustainable growth economy.

Related to this issue, Governor of SBV Le Minh Hung affirmed, SBV will continue to promote credit growth in prioritised areas in the near future such as production, exports and resolutely controlled capital disbursement, credit in risky fields. Thus, from the SBV’s point of view, the ability of monetary policy will remain at the stable level in the coming period, with balance needed to cope with inflation.

 


Category: Finance, Vietnam

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