Dr. Nguyen Thi Kim Thanh
Director
Banking Strategy Institute
State Bank of Vietnam
The first quarter of 2008 saw major economic imbalances as manifested in the following indices: lowers economic growth rate (7.4%) than the same period of 2007 (7.8%); a 3.5-fold trade deficit increase due to a 62.5%, rise in imports (almost doubling that of the same period of 2007 as the result of both higher prices and greater quantity), as exports rose only 22.7%; and a consumer price index 19.39% higher than that in the same period of the preceding year.
Meanwhile, the monetary market was marked by such signs of instability as weak liquidity, higher interest rates and a vigorous downturn of the securities market, with the securities index falling from over 1,000 points at the end of 2007 to only 516 by the end of March 2008.
In light of the situation, the Government worked out various solutions for controlling inflation and curbing economic decline as clearly seen through the following documents:
- Document No. 75/TTg-KTTH of January 15, 2008 and Document No. 319/TTg-KTTH of March 3, 2008, on enhancement of measures to control inflation in 2008;
- Resolution No. 30 of December 11, 2008, on major solutions to direct and administer the implementation of socio-economic development plan and state budget estimate of 2009; and,
- Decision No. 131/QD-TTg of January 23, 2009, on interest rate support for organizations and individuals borrowing capital from banks for production and business development.
The Government also requested ministries and branches to make concentrated efforts to halt the economic decline, boost production and business, step up exports, stimulate investment and consumption and ensure social welfare, striving for an economic growth rate of 6.5% in 2009, which has been adjusted to only 5% since the economic growth rate in the first quarter of 2009 represented only 60% of the growth rat of the first quarter of 2008.
Thanks to drastic anti-inflation measures, the inflation rate in the third quarter dropped markedly to 7.64% as compared to 19.39% in the same period of 2008. Registered foreign direct investment (FDI) in the first nine months of this year reached USD 12.54 billion, of which USD 7.2 billion has already disbursed. The credit market did not fall into a frozen state as in other countries but became ebullient again, while the securities market, though not yet stable, has improved.
In the banking sector, the State Bank Governor proposed timely measures to handle unfavorable developments, flexibly implementing monetary policies and exchange rates not only to fight economic decline and control inflation but also to stabilize the financial market and minimize the impacts of the global financial crisis on the Vietnamese financial market. Confronted with the decline of foreign capital pouring into Vietnam through direct or indirect investment and overseas Vietnamese remittance, which placed pressure on domestic prices and the supply of foreign currencies, the State Bank applied various coordinated measures to strictly control the foreign exchange market, restricting speculation in foreign currencies while flexibly and harmoniously handling the relationship between foreign currency and Vietnam dong interest rate to ease pressure on foreign currency purchases and increase business demands for loans in foreign currencies.
Having anticipated the adverse impacts of the stimulus package at a time when bank credit was tending strongly to increase, the State Bank Governor has adopted timely measures to ward off such dangers, intensifying inspection and supervision of interest-subsidy loans, directing credit institutions not to relax borrowing conditions, and working out plans for reasonable credit growth to ensure efficiency and further tighten financial disciplines.
As a result, foreign currency interest rates on the market have been lowered by commercial banks, stimulating the demand for foreign currency loans (outstanding foreign-currency loans in May 2009 had decreased by 9.55% but rose 1.2% from June to July) and prompting the sale of foreign currencies, instead of speculation, by individuals seeking to make bank deposits in Vietnam dong.
So, what additional measures should be taken to ensure a sustainable economic development post-recession? To find a correct answer for this question, we should analyze, assess and anticipate factors exerting positive as well as negative impacts on sustainable economic development.
First, the early recovery and development of the world economy in 2010 will create favorable conditions for Vietnam. Otherwise, the Vietnamese economy will certainly be confronted with difficulties.
Second, the fulfillment of WTO commitments after the crisis will bring no fewer difficulties in the initial period for switching from circumstantial and administrative solutions to market solutions.
Third, the impact of the anti-recession stimulus package on post-crisis economic development should be taken into serious consideration. The Government stimulus package was, in essence, the pumping of money into the economy through various relaxed fiscal and monetary policies. Its short-term impact was to stop the economic decline, help businesses surmount difficulties in the period of global financial and economic crisis and improve the credit, securities and real estate markets. However, it may also result in medium- and long-term side effects.
The Government increased spending on infrastructure construction while reducing revenues through tax breaks and rescheduling. This was expected to result in a budget deficit of 7% of GDP in 2009 as against 5% in previous years. If the state budget expenditures for these purposes bring about good results, the state budget deficits will soon be made up for in subsequent years when these works are put to use. Yet, if such investment proves to be less efficient, the state budget deficits will increase together with a greater threat of inflation.
If the amount of VND 17 trillion provided by the Government as interest rate subsidy is inefficiently used for improper purposes, the banking system will probably face higher non-performing debts.
Meanwhile, if businesses, especially exporters, no longer enjoy the Government’s interest rate subsidy and tax breaks but production has not yet recovered and their major partners’ economies have not yet recovered from the crisis, exports would be unlikely to recover and expand, thus shrinking domestic demand and production. Yet, if businesses adopt good business strategies and work out schemes on reserves for increasing production costs when preferential bank interest rates are withdrawn, they will surmount post-crisis difficulties.
From the above analysis and assessment, it can be realized that the monetary and banking systems may face such post-crisis difficulties as:
- Bad debts in the banking system may increase if the stimulus package yields low efficiency due to improper use and losses suffered by enterprises;
- A looming danger of inflation, if investment from the state budget and banking system are less efficient; and,
- A possibility of increasing financial market instability if signs of economic imbalances and higher budget and trade deficits and inflation rates appear; hence, the pressure to devalue the Vietnam dong will be greater, which may cause major instability.
Therefore, post-crisis monetary policies must aim to control inflation, prop up economic growth and stabilize the financial market. To attain these targets with efficiency, efforts should be concentrated on the implementation of following measures:
- Determining and controlling reasonable credit growth rates for 2010 so as to ensure adequate capital for economic growth and control the money supply, while intensifying the control of credit quality. This constitutes an important factor to ensuring sufficient banking system capital in support of economic growth without causing inflationary pressure.
- Renewing current interest rate and exchange rate administrative mechanisms by the State Bank. Studying the prime interest rate to boost economic growth at the target inflation level and implementing a mechanisms to administer regulated floating exchange rates, aiming to ensure that the nominal exchange rates will center around efficient implementation exchange rates. These are two important matters in implementing monetary policies in order to achieve the above-said targets after the crisis.
- Further enhancing financial market discipline by way of strictly stipulating the liquidity, investment quality and security in operations of credit institutions; raising the quality of risk management by commercial banks through information technology; intensifying measures for efficient remote supervision and on-the-spot inspections. This requires the formulation of a system of standard criteria for assessment of quality of operation of the financial market and the establishment of an early warning system.
- Reducing the latent danger of inflation. Monetary policies alone can hardly settle the issue. Vietnam’s high inflation rate in 2007-08 was attributed to higher world prices, natural disasters, crop failures and also to irrational economic structures with low efficiency and rapid increases of the supply of money in the economy due to credit growth, greater foreign investment and higher government spending. So, apart from monetary policies, we should:
(i) Restructure the economy and economic growth patterns. Formerly, economic growth relied largely on final consumption than investment, but now must rely largely on investment. According to figures released by the Central Institute for Economic Management, during 1991-2008, average final consumption contribution to the GDP represented over 5% while investment accounted for 4.3%. In 2008 alone, final consumption contribution to the GDP was recorded at 6.6% and investment contributed 2.77%. Moreover, the relationship between final consumption contribution to the GDP and the inflation rate in that period tended to be in a direct ratio. In addition, domestic production relied largely on the import of raw materials; hence, domestic production costs were considerably impacted by world prices. For that reason, economic growth patterns need to be changed to rely on domestic investment and production. The Government should adopt policies to encourage enterprises to manufacture import substitutes, thereby reducing imports, easing pressure on foreign currency supplies and reducing the impact of world prices on domestic prices.
(ii) Raise the efficacy and quality of investment in all economic activities. This is an extremely important factor ensuring the attainment of the targets for a growth rate of 5% and for an inflation rate of under 10% through the implementation of monetary and fiscal policies. The amounts in the Government stimulus package should be used properly and efficiently, creating a corresponding volume of goods and minimizing inflation pressures. If not, a given amount of money will run into the pockets of a group of people, thus creating a Basala effect and inflationary pressure.
(iii) Ensure coordinated implementation of monetary and fiscal policies. This is also an important guarantee of the effectiveness of these two tools in the achievement of economic objectives in 2009 and subsequent years.-