|Fitch Solutions believe that macro-prudential measures will continue to be a good choice for the central bank over the coming quarters to manage financial stability risks. (Illustrative photo: Internet)
The analysts stated in a newly-released outlook for Vietnam’s interest rates that the State Bank of Vietnam (SBV) would continue to manage financial risks through non-interest rate measures like loan directives and macro-prudential ones as monetary policy transmission in Vietnam remains weak.
Meanwhile, Vietnam’s five-year government bond yield stands at 3.85 per cent, below the SBV’s discount rate of 4.25 per cent, and this continues to suggest that monetary policy transmission is still not optimal due to excess liquidity in the banking system.
Bank lending rates are high and appear to be on the uptrend. For example, interest rates at Techcombank now range from 6.80 - 9.83 per cent on large VND-denominated corporate loans in June, as compared to the ratio stretching from 6.40 - 9.00 per cent in March. Moreover, high deposit interest rates at 6.80 per cent for tenures above 12 months for both Agribank and Vietcombank suggest that lending interest rates should be high in these banks.
Fitch Solutions, a macro-research subsidiary of Fitch Group, cited the SBV Credit Department as saying the credit outstanding to the economy by late May 2019 was 5.74 per cent higher as compared to the end of 2018.
At 5.74 per cent, credit growth is now at 41 per cent of the Government’s full-year 2019 target of 14 per cent. The Government’s five priority sectors, including export, high-tech industries, agriculture, spare-parts industries, and small and medium sized enterprises, reported strong credit growth.
In particular, credit to export and high-tech industries recorded robust growth of 13 per cent and 14 per cent, respectively, while credit to the agriculture and rural sector increased by 5 per cent and that to support industries rose by 4 per cent over the same period.
Credit to risky sectors such as those in securities, real estate, and consumer loans has been strictly controlled in line with the orientations of the SBV.
Managing risks through macro-prudential measures
Fitch Solutions believe that macro-prudential measures will continue to be a good choice for the SBV over the coming quarters to manage financial stability risks. According to SBV regulations, the proportion of short-term capital to be used for medium and long term lending by banks will have to be reduced to 40 per cent in 2019 from 45 per cent in 2018. This has already seen some smaller and less well-capitalized banks raise interest rates offered on long-term time deposits since the first quarter of 2019, with the aim of attracting the capital needed to meet this requirement.
In June, the SBV released a draft circular seeking public comment on further macro-prudential measures the central bank intends to introduce to manage financial risks, with a specific focus on managing the risk of lending to the real estate sector.
The circular encompassed a number of changes, including a further reduction to the ratio of short-term capital for medium and long term loans to 30 per cent by July 1 2020, aiming to help the central bank manage liquidity risks in the banking sector. To be sure, this regulatory change would apply to loans in all sectors and not just the real estate sector.
Other regulatory changes proposed include raising the risk weight ratio for home purchase loans worth VND3 billion (US$129,000) and above and loans worth between VND1.5 billion (US$64,500) and VND3 billion to 150 per cent and 100 per cent, respectively, from 50 per cent at present.
Housing mortgage loans worth less than VND1.5 billion and loans for the purchase of social and government supported housing projects will remain at the risk weight ratio of 50 per cent. According to the SBV, these changes look to channel real estate credit toward borrowers with genuine housing needs instead of speculators and to balance the development of low-cost commercial and social housing as demand in the low-cost segment still outstrips supply.
Additionally, the authorities are expected to focus their efforts on banking sector reforms as credit growth remains one of the SBV’s main monetary policy tools. The SBV tailors credit growth quotas for each bank, with healthier banks being assigned a higher quota, vice versa, in order to regulate overall credit growth within its annual target.
Risks to Fitch Solutions’ view are that the credit growth is likely to come in below the SBV’s 14 per cent target for the year. Raising the risk weight of real estate loans will likely reduce the appetite for credit expansion in this segment among credit institutions. Additionally, slowing real GDP growth – in which the research unit forecast to slow to 6.5 per cent in 2019 from 7.1 per cent in 2018 – would also weigh on demand for business loans over the coming quarters.