Piling Monetary Hurdles Test Vietnam’s New Central Bank Chief

Tuan Minh

15:07 15/04/2016

BizLIVE - The newly-elected governor of the Vietnamese central bank will have to smooth thorny obstacles to support economic growth.

Piling Monetary Hurdles Test Vietnam’s New Central Bank Chief

SBV Governor Le Minh Hung. (Photo: www.eurochamvn.org)

Le Minh Hung, who was elected last week as governor of the State Bank of Vietnam (SBV), will have to tackle a number of challenges to aid businesses and boost economic growth, which showed signs of stagnation in the first quarter of this year.
Pickup of Interest Rates
The very first hurdle for Mr. Le Minh Hung, the youngest of the cabinet members, lies in lowering interest rates which went up slightly in March and are poised to continue the uptrend toward the year-end.
According to Ho Chi Minh City Securities Corp (HSC), among the leading brokerage houses in Vietnam, interest rates on dong-denominated deposits at the end of March edged up six basis points (bps) month-on-month to 6.02% per year on average while lending rates rose six bps to 9.42%.
Rates in Vietnam will be driven up by the global upturn led by the Fed’s rate hikes, a pickup in inflation at home and the revision of Circular 36 which requires banks to increase mobilization if they want to scale up lending, according to HSC.
“The pace of the rise in interest rates has been moderate so far. However, we expect the rise will gain momentum in the second half. Mobilization rates are likely to gain one percentage point this year,” the second-largest brokerage house on the Hochiminh Stock Exchange added.
The new SBV head should pay special attention to interest rates, said economist Tran Du Lich. “[He] needs to manage rates not to hike rates and run the forex rate flexibly to buttress exports,” Mr. Lich added.
Sharing the same view, Bui Duc Thu, member of the National Assembly (NA)’s Budget and Finance Committee, said the SBV governor needed to keep interest rates stable. “Rising deposit rates will consequently result in an increase in lending rates. This will threaten local production and business, and the national economy.”
Bad Debt
Resolving soured loans will be another challenge for the newly-elected SBV governor although system-wide non-performing loans (NPLs) are reported to have fallen to 2.55% at the end of 2015, lower than the 3% targeted by the government.
Many NA deputies and economists have argued that the volume of NPLs remains huge and the decline in the bad debt ratio has been due to unloading to SBV-run Vietnam Asset Management Company (VAMC).
VAMC has purchased more than $11 billion worth of troubled loans, but has recouped just 9% of the amount due mostly to legal obstacles.
“Most of NPLs have been transferred to VAMC, but yet to be dealt with radically. Bad debts, by nature, remain there,” said lawmaker Than Van Khoa.
Sharing the same view, Le Duc Thuy, a former SBV governor, commented that bad debt is seemingly no longer a problem. However, debt classification in Vietnam may not align with international practices.
He suggested using state funds to help clean up bad debt.
“The reduction in NPLs is largely due to the recovery of credit growth and transfer of NPLs to VAMC. While banks are required to gradually provision against assets transferred to VAMC, the underlying credit and associated capital impairment risks have not been fully eliminated,” the World Bank noted in its latest report released on April 11.
Lawmaker Bui Duc Thu warned that the return of bad debt was obvious if there are no major measures to restructure credit structure, overhaul the economy and improve the nation’s economic competitiveness.
“Credit needs to be funneled to much needed sectors and be effective. Ensuring credit quality must be a priority of the monetary policy in the time to come,” he stressed, referring to alarming rise in loans for the real estate sector.
Bank Overhaul
The SBV has been striving to reshuffle the overcrowded banking system through consolidation, mergers and acquisitions, and compulsory takeovers of ailing lenders.
“There has been progress in consolidating the banking sector through several mergers and acquisitions, but the target of reducing the total number of commercial banks to 15 to 17 by 2017 (from 34 currently) remains challenging,” said the World Bank.
The central bank last year took over three troubled banks namely Vietnam Construction Bank, OceanBank and GPBank at zero cost. It also approved the fusions between Sacombank and SouthernBank, BIDV and Mekong Housing Bank, and Maritime Bank and Mekong Development Bank.
Le Minh Hung is supposed to keep the foreign exchange rate and the gold market stable in the context of the Fed probably raising interest rates this year and China likely devaluing its currency further.
The SBV needs to build up a freer gold and forex market, said Nguyen Duc Thanh, director of the Vietnam Institute for Economic and Policy Research (VEPR).
“Hung was a deputy SBV governor and is experienced [in managing the monetary policy]. I hope Hung to continue the unfinished restructuring process of his predecessor,” said senior economist Tran Du Lich.