05:36 (GMT +7) - Saturday 23/09/2017

Banking & Finance

VNDirect Securities: Economic policies to be loosened

Released at: 09:31, 29/09/2016

VNDirect Securities: Economic policies to be loosened

Photo: Duc Anh

Latest report from securities company argues that the government will loosen policies so that GDP growth target can be reached.

by Hung Nguyen

VNDirect Securities expects a loosening of economic policies by the government from the beginning of October in a bid to achieve the annual GDP target of 6.7 per cent, according to its report released on September 28.

To achieve the target the government will loosen monetary policy by lowering interest rates and increasing crude oil exploitation.  

“Some commercial banks have cut their interest rates and PetroVietnam has been directed to increase its crude oil exploitation,” VNDirect’s analysts wrote.

PetroVietnam was directed to exploit 1 million more tons of crude oil this year, which will add 0.3 per cent to national GDP.

The policy space for loosening fiscal policy is limited due to the State budget deficit and public debt being high.     

The State budget deficit has stayed at a high 5 per cent or more annually over the last five years, resulting in it inching towards the ceiling of 65 per cent of GDP. With the current situation the possibility of using fiscal policy to increase economic growth is therefore limited.  

In order to secure financial capacity in the medium term the government is making some initial moves to balance the State budget. According to its plan approved recently by the National Assembly, the budget deficit is to be cut to 4.95 per cent of GDP annually.

“Normally, in order to balance the State budget the government will cut spending or increase revenue,” the report noted. “It is unlikely, however, that Vietnam would cut spending at the moment as it would negatively affect economic growth. Moreover, operational spending and repaying public debt account for 85 per cent of total spending, and with this structure it is hard to cut spending.”

The government will not have much space to loosen fiscal policy to any great extent. An example of that is Circular No. 06 having lower risk indicators for commercial banks compared to the draft of Circular No. 36.

On the other hand, the State Bank of Vietnam (SBV) has longer maturities on government bonds, of five to ten years. The interbank interest rate also remains low.

The pressure to increase interest rates on government bond has eased as Vietnam has reached its target for 2016. Therefore, the report said, from now to the end of the year the SBV’s interest rate management will be easier.

An important factor for the government in loosening economic policies is that the US Fed may only increase interest rates by 0.1 per cent this year, from 0.5 per cent to 0.6 per cent.

User comment (0)

Send comment