Flexibly, prudently operating monetary policy

Tuesday, 2020-01-14 17:30:15
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NDO – The active, flexible and prudent monetary policy management from the State Bank of Vietnam (SBV) has contributed greatly to the nation’s macroeconomic stability, inflation control, and economic growth in 2019, amidst unfavourable international developments.

Maintaining market stability

Following the policies from the Party, National Assembly and the Government on socio-economic development in 2019, the SBV has consistently and flexibly operated monetary policy instruments to stabilise the monetary and foreign currency markets and control inflation.

Accordingly, the State Bank has conducted open market operations to regulate the amount of money in the economy, thus maintaining stability in the market. While at the same time, it’s also coordinated other monetary policy instruments, contributing to monetary control and refrained from creating pressure to increase inflation, thereby supporting exchange rates and market interest stabilisation.

As a result, the average inflation and core inflation remained relatively stable at low levels, creating room for the Government to adjust the prices of goods and services managed by the State. This also marks a remarkable success in operating the monetary policy of the SBV, which continues to play a vital role in managing inflation as assigned by the Government and the National Assembly.

Regarding operating interest rates, in the context of rising international interest rates, the SBV has coordinated monetary policy measures to stabilise interest rates, contributing to macroeconomic stability and supporting economic growth at reasonable level. Based on the assessment of the macroeconomic situation and the money market, from September 16 last year, the State Bank ordered a reduction of 0.25% a year to the operating interest rates to continue creating favourable conditions to support the economy and liquidity of the credit institution system.

After the move to lower the interest rates, by mid-November 2019, the SBV asked credit institutions to lower the deposit rate cap for less than one month terms to 0.8% a year and 5% a year for tenors from one month to less than six months, while lowering the ceiling short-term lending interest rate for priority areas to 6% a year. This move is considered a reasonable and worthwhile step, in line with the general trend that central banks around the world are taking to maintaining growth momentum of the economy.

Thanks to that, the interest rate ground fundamentally remains stable. Currently, the average mobilising interest rate in VND is 0.2-0.8% a year for demand deposits and terms with less than one month, 4.3-5.0% a year for deposits with term from one month to less than six months, 5.5-7% a year for deposits with a term from six months to less than 12 months, and 6.6-7.5% a year for the term of 12 months or more. VND lending interest rates are popular at 6-9% a year for short term and 9-11% for medium and long term.

Along with the interest rate tool, the management of credit growth is in line with the macro balance, meeting the capital demand of the economy associated with improving credit quality, which also contributes to promoting economic growth. Based on the 13.89% credit growth at the end of 2018, as well as the economic growth and inflation target in 2019, the State Bank has set the target of credit growth of 14%, with flexible adjustments in line with the present situation to control inflation, maintain macroeconomic stability and support rational economic growth.

In particular, the exchange rate can be considered as the brightest point in the big picture of banking undertakings last year. In 2019, the SBV operated the exchange rate proactively and flexibly, in accordance with developments in the domestic and international market, as well as macro and monetary balances and the objective of operating monetary policy. The VND continues to be among the most stable currencies in the region despite geopolitical uncertainty.

Restructuring banking systems and handling bad debts also continued to be drastically implemented. Bad debt ratio has been significantly reduced and controlled at a low level, while regulations in banking activities have been strengthened, thereby increasing public confidence and stabilising the banking and financial system.

Promptly fending off external shocks

2019 passed with various successes in operating monetary policy which has been acclaimed highly by international and domestic organisations. 2020 comes with both new opportunities and challenges, but the Government of Vietnam has always been consistent with the priority to maintain a stable macroeconomy, accelerating reforms in important areas and boost growth model innovation. 2020 is also the last year in the 2016-2020 Socio-Economic Development Plan, so, together with the relevant ministries and sectors, the State Bank has set a target to continue to make great efforts to achieve the goals set for the period, while at the same time preparing for the next stage of development. In that spirit, in its duties and functions, the SBV is set to continue to conduct monetary policy in a prudent and flexible manner, in synchronised coordination with other macro policies, while better supervising the banking system to maintain financial and monetary stability and contribute to improving the business environment.

Monetary policies need to closely follow the movements of financial and monetary markets and geopolitics in the world to have an appropriate scenario. It is necessary to develop and effectively operate monetary policy management instruments and have appropriate management policy frameworks to ensure the Vietnamese banking system can promptly cope with international economic and financial shocks.

Although horrendous debts having been dealt with is an important step, there are still potential risks to safety and operational efficiency of credit institutions. Bad debts are currently concentrated mainly in weak credit institutions, but the handling of these debts are still faced with many difficulties. This is a matter that needs to be paid close. attention to by the management agencies as well as the credit institutions themselves in the near future.

Regarding the exchange rate, with the results achieved in 2019, Vietnam will have a basis to ensure the exchange rate will continue to be operated under a flexible mechanism in 2020. Remarkably, with the record high foreign exchange reserve (at about US$73 billion), the State Bank has enough tools and resources to manage the exchange rate in a stable manner, meeting the market supply and demand. However, there are still challenges to be observed and monitored, such as instabilities when the global economy shows signs of slowing, the US-China trade tension and Brexit, as well as the US presidential election in 2020.

Within the context of continuously changing geopolitical situation in the world, exchange rate trends will continue to witness unpredictable variables. This requires the SBV to continue coordinating with the executive agencies to manage the market in a flexible and proactive manner, in order to avoid creating exchange rate and interest shocks. Credit growth also needs to be strictly controlled in order to control the credit scale in line with the orientation targets, contributing to promoting reasonable economic growth, at the same time improving credit quality and creating favourable conditions in accessing credit capital.

Finally, the fourth Industrial Revolution is dealing with strong impacts on all industries and socio-economic fields, including banking. Facing the opportunities and challenges from the digital revolution, the banking industry needs to continue to actively implement the laid out scheme to promote non-cash payment, promote IT security and safety in banking operations and pilot new payment models to adapt to new requirements and timely capture new opportunities.