The State Bank of Vietnam
(SBV), the country’s central bank, should further loosen the monetary policy to cool down interest rates which have been on the rise since the end of 2015, experts have said.
Upward Pressures on Interest Rates
Local banks have lifted deposit interest rates across key tenors by dozens of basis points since the start of this year. The SBV caps rates on less-than-six-month deposits at 5.5% per year while rates of other terms are floated.
Bank for Foreign Trade of Vietnam (Viecombank) has hiked its top rate offered for 24 to 60 months to 6.5% per year from 6.2% previously.
Bank for Investment and Development of Vietnam (BIDV
), the second-largest banks in the country by assets, has elevated its ceiling rate for long-term deposits by 0.4 percentage points to 7.2% per year.
Deposit rates have increased 0.2-0.5 percentage point from those recorded before the Lunar New Year holiday, which fell in early February, suggesting higher demand for capital.
Securities Co. (VCBS) and British bank HSBC have predicted that rates could rise by 50 basis points this year from 2015.
Rates may continue to climb, possibly by one to two percentage points this year from the average in 2015. “Thus it is obvious that enterprises cannot expand operations normally as they did last year,” Le Duc Thuy, former SBV governor, said at a seminar in Hanoi last week.
Higher Inflation Expectations, Circular 36 Revision Drive Rates up
In its latest report, VCBS says that increases in interest rates are reasonable since inflation is latent and is expected to surpass last year’s record low. In addition, devaluation pressure on the Vietnamese dong is not over yet.
The brokerage house adds that lending outpaced mobilization in 2015, leading to higher loan-to-deposit (LDR) ratio at some banks. Moreover, the banking regulator is mulling tightening the use of short-term capital for medium- and long-term loans.
Nguyen Hoang Minh, deputy director of the SBV-Ho Chi Minh City branch, ascribed stronger credit needs to piling pressures on interest rates. The credit growth target of the whole banking system is set at 18%-20% this year, higher than expansions of between 10% and 15% over the past few years, prompting banks to boost mobilization, he explained.
The SBV is revising Circular 36, effective in February 2015, by cutting the percentage of short-term capital used for medium- and long-term lending to 40% from 60% presently.
“The revision may force banks to prepare more medium- and long-term capital to meet the 40% requirement while continuing to provide medium- and long-term funding,” Mr. Minh added.
Meanwhile, a number of banks are facing liquidity troubles. They have to constantly attract new deposits to pay off due ones while they cannot recover accrued interests.
G-bonds among Push-up Factors
Experts have also identified government bonds (G-bonds) as the main determinant that pushed rates up.
The market’s interest rate curve depends on yields of G-bonds, said Le Xuan Nghia, director of the Business Development Institute, adding rising G-bond yields have prevented interest rates from going down.
Ph.D Le Xuan Nghia, director of the Business Development Institute. (Photo: Internet)
Commercial banks have rushed to buy G-bonds, which have high yields and a zero risk coefficient. Currently, banks hold over 80% of total outstanding G-bonds.
Echoing with Mr. Nghia, Bui Quoc Dung, director of the SBV’s Monetary Policy Department, also named G-bonds as one of the major factors that exert pressure on interest rates.
The yield of five-year G-bonds climbed to nearly 7% per year toward last year’s end from 5.5% earlier. A high issuance volume this year will weigh heavily on medium- and long-term interest rates, Mr. Dung noted.
Monetary Easing Suggested
If rates continue the upward trend, all efforts to spur the economy and reform the banking system will fail, Mr. Nghia was quoted by the Dau Tu (Investment) newspaper as warning.
To reduce interest rates, he recommended the SBV loosen its monetary policy by reducing the required reserve ratio and limiting the issue of SBV bills. The banking regulator should also be more active in the interbank market.
In addition, the government should adopt strict measures to reduce the budget deficit, which in turn will help reduce the issuance of G-bonds.
The Vietnamese central bank is considering allowing joint venture and wholly foreign-owned banks in the country to use up to 35% of their short-term funding to buy G-bonds, a considerable rise from the current 15%.