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PM calls for further rate cut

Released at: 07:35, 13/09/2017

PM calls for further rate cut

Illustrative image (Source: nganhangbanle.org)

Central bank asked to cut lending rate by a further 0.5 percentage points to help country meet its annual growth target of 6.7%, according to government statement.

by Quang Huy

Prime Minister Nguyen Xuan Phuc has asked the central bank to endeavor to cut its lending rate by a further 0.5 percentage points to help the country meet its economic growth target, according to a government statement, which added he has asked all ministries and government bodies for assistance in meeting the 2017 growth target of 6.7 per cent.

The State Bank of Vietnam (SBV) cut its benchmark refinancing rate by 25 basis points to 6.25 per cent in July while making a cut of 50 basis points to lending rates for priority sectors.

Despite advice from the International Monetary Fund (IMF) to keep monetary policy, which is still suffering fallout from the 2011 banking crisis, on hold because of concerns over the pace of credit growth, the central bank defended its surprise decision to cut interest rates.

It said the rate cuts would boost economic growth, which is short of the 6.7 per cent target for the year, as the economy grew at an annualized 5.73 per cent in the first half.

Economists believe supporting economic growth through credit is a reasonable strategy given the rising role of private consumption and non-State investments. Moreover, rising public debt may be an impediment to increased government spending in the future.

In contrast to GDP, the pace of Vietnam’s credit growth has continually increased over recent years, with first half growth of 7.54 per cent at its fastest for six years. “This indicates that enterprises’ capital absorption capacity and banks’ earnings from interest have improved significantly,” the General Statistics Office (GSO) said.

Assuming growth over the remaining months remains exactly in line with last year’s result, HSBC wrote in its latest report that it believes credit growth should reach 19.3 per cent by year-end, while the SBV’s rate cuts in July should also push up the pace of credit growth towards the new target of 21 per cent.

Official data suggests that the trade, transport, and telecommunications sectors have been larger contributors to credit growth since the beginning of the year, which is a positive development and may help improve the domestic industry’s export competitiveness.

Strong credit growth, however, also means a rapid accumulation of debt. The debt to GDP ratio is now about 122 per cent, up from 95 per cent in 2012, and will likely continue to rise further. In addition, though the central bank has kept its monetary policy steady, it expects money supply (M2) to rise by 16-18 per cent this year due to such credit expansion.

“Rapid credit growth may create new risks for the banking sector, especially if it is placed in less productive industries,” HSBC economist Mr. Noelan Arbis noted. “For instance, real estate-related sectors still appear to be contributing the most to total credit growth, despite their declining contribution in recent months.”

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