Talking to DTCK, economist Dr Le Xuan Nghia said that in the context of weak demand and low inflation as at the present time, the State Bank of Vietnam (SBV) can loosen monetary policy by a reasonable level.
Concerning the unpredictable developments of the exchange rate in the past few days, Dr Nghia said that the foreign exchange (forex) market in the recent time has undergone a transitional stage. In 2015, the foreign currency speculation was fairly common. Nevertheless, the current account balance and financial balance were both surplus, while the balance of payments saw relatively large deficit. Banks speculated foreign currencies due to two reasons, which are (1) to make profit in the context when credit activities are difficult and (2) to avoid exchange rate risk when the market fluctuates. Exporters also speculated foreign currencies to make payment as planned and people also expected the exchange rate to rise.
However, Dr Nghia believed that there will be no major changes in the forex market in the near future as SBV has adopted a series of measures, including the two most important points. Firstly, there are basic changes in the exchange rate management and operating mechanism towards more flexible orientation. Secondly, banks will be penalised by increasing compulsory reserves if their forex state is excessive for three days, and banks thus cannot make profit for the speculative of foreign currencies. Furthermore, the report on forex status is tightly controlled and must be signed by the head of the bank.
For the psychology of people, the hoarding of foreign currencies remains a habit which cannot easily be given up. However, in the long term, this issue will end if the macro economy becomes stable and the people have confidence in dong. In fact, the supply and demand of foreign currencies is not as imbalanced as people think, and the fluctuations in the recent days are insignificant.
According to Dr Nghia, liquidity is always a matter of Vietnam’s banking system. Particularly, after the government again approved the issuance of short-term bonds, the banking liquidity will have more problems, especially for small banks, as they have been struggling in liquidity.
Besides, the yield curve of government bonds is following an upward trend. The Credit default swap (CDS) which measures the risk of government bonds is also increasing, demonstrating that even the buyers of government bonds are not assured with the state budget increase. These two ratios make banks to be wary of liquidity, and the interest rates thus tend to increase slightly in both mobilisation and lending. Since enterprises (which are expecting to borrow bank loans for investment expansion) will give up if the interest rates rise by one to two percent per annum, this is a big matter of concern at the present time.
Regarding the solutions, Dr Nghia said that in the context of weak demand and low inflation, SBV can loosen monetary policy by a reasonable level, for example reducing the required reserves, stopping the issuance of SBV bills, increasing discount on government bonds and special bonds (to purchase bad debts), promoting the open market operations, and maintaining low and stable interbank interest rates.
Although prices of some commodities and services increased in the Lunar New Year holiday, not to mention the increase of healthcare and education service costs, inflation has not been affected. It showed that the demand is in fact really weak and the tendency of loosening monetary to stimulate demand will continues globally. Certainly, when loosening monetary policy, capital will flow into real estate sector, as this is an investment channel and also a safe haven. Nevertheless, the real estate supply will remain much larger than demand and according to calculation of Dr Nghia, they demand will only balance by 2018.
At the current time, the real estate market shows no sign of sudden changes, not to mention that the new regulations of the Law on Real Estate Business, which regulates real estate project investors to have bank guarantees, will eliminate investors who do not have sufficient financial resources and purify the market.
An issue to be noted that the warming of real estate market is very beneficial for the banking system, as banks will have the opportunity to liquidate guaranteed-assets of enterprises which are mainly real estate. According to Dr Nghia, tightening credit at this time is too early and there should be more methodical and long-term measures to control real estate lending.
Source: DTCK/ intellasia
Keywords: Vietnam, loosen, monetary policy
