Right Time, Wrong Time
By Viet Nguyen
These days rumors have got around that the central bank will soon issue an announcement about lowering dong deposit interest rates. Financiers and bankers argue that it is premature to impose a rate cut. The business circle, however, is moaning and groaning about the unbearable interest burden they have shouldered.
Statistics show that last year some 50,000 enterprises were either in the red or disbanded, or went bankrupt. Across the board, companies ran into difficulties as their business became stagnant, forcing them to downscale production plans.
According to reports from the General Statistics Office (GSO), production of the manufacturing and processing industry in Vietnam fell substantially in January, only equal to 76% of that of December and 83% of the same period last year. Meanwhile, stocks in January of the entire industry rose by 17.4% year-on-year. Among the sectors suffering from the highest rate of stock were suppliers of input materials, such as fertilizers, cement and steel whose stock indicators were as high as 50% or 70%. Businesses have pointed an accusing finger at what they claim the current exorbitantly high interest rates.
Bankers say they have born the brunt of high interest rates which have kept borrowers at bay. According to the central bank, the total outstanding loans of the entire banking system in January dropped by 0.79% versus December. Leaders of several commercial banks say the situation might be the same in February. Lately, some banks have cut their annual lending rates by 1-2%. It can be said that the urge to cut interest rates has become desperate to both lenders and borrowers.
Resolution No. 02/NQ-CP dated January 3, 2012 by the Government on major measures to implement the 2012 socio-economic plans and State budget estimate still sticks to last year’s mentality in which the State grips control on interest rates. In other words, the State will reduce interest rates in a reasonable manner in line with macroeconomic developments. The central bank governor, Nguyen Van Binh, has many times made clear his target for lowering dong deposit interest rates, which would help realize macroeconomic schemes and redirect capital to production and the stock market instead of savings bank accounts. This trend is pervasive in the world. Take the recent European Union Summit for example, where priorities were put on growth boost and job creation.
Driven by a high deposit rate—officially 14% a year but in fact, that of big deposits can be as high as 18-19%—and a lending rate ranging between 17% and 25%, the balance has swung too far in favor of depositors and banks. The Vietnamese economy has lost much of its capital absorption. Without a resolute action and feasible plans to cut interest rates, the local economy may be at risk of suffering from a new recession cycle which will possibly put it out of tune with the global economy.
When asked, the majority of financiers and bankers have answered that lowering the ceiling rate for dong deposits is out of the question for the time being. They have cited three reasons for their opposition, including banks’ liquidity being slow to improve, bad debts on the rise and the menace of a returning high inflation.
Some bankers maintain that the current liquidity of most State-owned commercial banks and several joint stock commercial banks is relatively stable. However, that of the rest—in particular those in groups three or four (the central banks have classified operational commercial banks into four categories in accordance with their performances with the best in group one and the worse in group four)—is alarming.
Despite a 14% annual deposit interest rate which has been maintained so far, the total deposit in January fell by 3.29% over December. What’s more, bad debts incurred by many banks in the first two months of this year were escalating. As deposits and debt repayments are plunging, interest rate cuts are expected to land a hard blow on the banking system and deprive the economy of capital it desperately needs.
However, even the bankers who are reluctant to cut interest rates agree that their customers are no longer tolerate the current high lending rates. Tran Dinh Thien, director of the Vietnam Economics Institute, once said in a workshop that only when the lending rate was dragged down to 9% a year, companies could be profitable. If firms continued to get loans at the current high rate, there would be one day when “open banks’ doors and you’ll see piles of companies’ corpses,” Thien claimed.
Some opine that currently inflation has not been harnessed to the point where lowering interest rates could be taken into account. According to the GSO, inflation rose in February by 1.37% against January, and by 16.44% year-on-year. February also marked the highest monthly inflation rate since May 2011. Furthermore, the market in recent days became hot with gas and service price hikes in both Hanoi and HCMC. On the global market, oil prices are predicted to hike again this year. All these things are giving rise to an inflationary comeback.
Although an interest rate cut remains controversial, there have been widespread rumors that such a cut will come soon. The cut is said to be one or two percentage points against the current rate. If this becomes a reality, such a decision will have significant repercussions for capital flow, exchange rates, inflation and economic development.