Monetary policy expected to give a push in 2020

14-Jan-2020 Intellasia | Vietnamnet | 12:05 AM Print This Post

According to experts of Saigon Securities Incorporation (SSI), the State Bank of Vietnam (SBV) had a remarkable year in monetary policy operation in 2019.

Specifically, unlike the upward trend when entering the peak season, the exchange rate and interest rates in the last month of 2019 were relatively calm. The State Treasury’s cash flows returned to the banking system and the foreign currency selling transactions brought an abundant supply of dong to commercial banks.

Statistics of SSI showed that in 2019, the US dollar/dong exchange rate recorded only single wave around May 2019 when the US-China trade relation became tense but quickly cooled down in a few weeks later. The exchange rate for the whole year almost went flat and tended to decrease in the end of the year. Overall, the dong in 2019 increased by 0.16 percent against the US dollar.

The overall balance of Vietnam was continuously in surplus, reaching an accumulation of nearly 14 billion US dollars in the first nine months of 2019 a record high level ever. A large amount of foreign currency supply helped the SBV purchase up to 20 billion US dollars in 2019, raising the national foreign exchange reserves to over 79 billion US dollars doubling the number recorded in the end of 2016.

Analysts said that the above results were not only thanks to the objective factors but also the SBV’s role in regulation.

From the beginning of 2019, the SBV sharply raised the buying exchange rate from 22,700 dong per US dollar to 23,200 dong per US dollar and kept it unchanged in 11 months. Most of the time the buying rate of the SBV was higher than the buying rate of commercial banks, creating a big attraction for foreign currency flows, increasing the foreign exchange reserve buffer.

When the exchange rate dropped sharply in December, the SBV also lowered the buying rate by 25 dong per US dollar, cleverly sending a message that the local currency moved up and down along with market supply and demand. It is a reasonable action when the US has always closely monitored countries with large trade surplus.

The 20 billion US dollars purchased for raising foreign exchange reserves are equivalent to 464 trillion dong injected to the market, equalling to 5.04 percent of the total money supply at the end of 2018. The SBV flexibly used tools to regulate the dong, and the outstanding treasury bills in circulation at the peak time reached 90 trillion dong. Thanks to the flexible monetary instruments which eliminated demand-pull inflation, the Consumer Price Index (CPI) the whole year 2019 was only 2.79 percentthe lowest level in the last three years.

Along with active response to ensure the stability of capital market, the SBV has been very consistent with the long-term goal of improving the quality and capacity of the banking system through drastically dealing with bad debts, issuing new circulars with a roadmap to tighten safety and liquidity ratios, giving warnings to high-risk activities, creating an environment for testing Fintech, etc.

“The results achieved in 2019 have increased the market confidence in the management capacity of the State Bank of Vietnam as well as the predictability of the policies of the management agency extremely important factors to increase the attractiveness of the Vietnam’s market,” SSI’s report assessed.

In line with global trends, the monetary policy in 2019 has shifted towards a more pronounced easing. The SBV simultaneously reduced operating interest rates, including two times reducing Open Market Operation (OMO) interest rates and three times reducing bill interest rates, by the same total reduction of 0.75%. the fluctuation zone of interest rates on the interbank market has significantly pulled down to 2.25 percentfour percent per annum.

The SBV also lowered the ceiling of maximum deposit interest rate in dong of commercial banks. The rate was cut to 0.8 percent per annum for demand deposits and deposits with terms of less than one month, and five percent per annum for deposits with terms from one to less than six months (the old rates were respectively one percent and 5.5 percent per annum). The short-term lending interest rate in dong of commercial banks to five priority areas was also lowered to six percent per annum (from 6.5 percent per annum) from November 19th 2019. With these requirements, the actual deposit interest rates of banks have plummeted on terms of less than six months. Although the rates for terms from six months and more are still at high levels, there have been signs of decreasing.

In the current context, the SSI forecasted that in 2020, the deposit interest rates are likely to further cool down based on two foundations including the liquidity of the banking system and the government’s orientation. Commodity prices and the foreign exchange market are variables that can accelerate or slow down the interest rate decline.

The reduction of long-term interest rates will still see differentiation between the groups of large and small banks due to the regulations on lowering the ratio of using short-term fund for medium and long-term lending. However, the control of small banks in 2019 has brought results, helping limit the interest rate race in the future.

It is forecasted that the credit growth in 2020 will be kept at the same pace as 2019 and may be lower. The current credit scale of Vietnam has reached 8,200 trillion dong, equivalent to 138 percent of the Gross Domestic Product (GDP), a fairly high ratio, and it will continue to increase in the next few years because the GDP growth can hardly surpass credit growth.

Although the capital market has grown rapidly in the past few years, the size of capital mobilisation (both shares and bonds) via the market remains small and the market is yet able to replace the position of credit in funding capital to the economy.

The total credit may slow down but credit to priority areas or business and production activities will generally increase high. In 2019, the credit to small and medium-sized enterprises rose up by 16%, and credit to high-tech enterprises increased by 15%, while the overall credit growth of the sector was less than 14%.

 


Category: Finance, Vietnam

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