Monetary and fiscal policies go their separate ways

Vietnam has been mostly relying on the monetary policies in regulating the national economy, while the fiscal policy has been ignored. (VIETNAMNET)

According to the Governor of the State Bank Nguyen Van Binh, by the end of May 2013, the outstanding loans had increased very slightly by 2.98 percent in comparison with the end of 2012. Of this, the dong outstanding loans had increased by 5.48 percent and foreign currency loans decreased by 8.41 percent.

As such, the lending interest rates have reduced by 2-4 percent in comparison with the beginning of the year, while the new loans’ interest rates are now equal to the rates applied in 2005-2006 and even lower than that in 2007. However, despite the sharp falls, the credit growth rate remains very modest. While commercial banks have continuously launched low-cost credit packages, businesses still keep silent and don’t intend to borrow money for the investment.

Bankers have affirmed that they have slashed the lending interest rates to the lowest possible levels.

Meanwhile, Binh said that the margin between the deposit and the lending interest rates has decreased to 3.03 percent, and if deducing the provisions against risks, the gap would be 1,93 percent only, much lower than the 2.33 percent seen at the end of 2012.

Binh said this was one of the reasons which led to the sharp falls of the credit institutions’ profits in 2012 and the first months of 2013.

Experts have been pointed out that the monetary policy has been abused, while the fiscal policy has not been used to stimulate the national economy. In other words, the monetary and fiscal policies have been going their separate ways, while they should strive to one thing.

Dr. Le Xuan Nghia, Head of the BDI, a business development research institute, said he and his colleagues have carried out a business survey and found out that businesses nowadays only strive to short term business plans, while they do not think of long term business strategies.

In 2009, when the government launched the interest rate subsidy package, under which the lending interest rate was lowered to 6.5 percent per annum, a lot of businesses believed that the government would stabilize the interest rate for a long term. With the confidence, they injected their money in developing their business and expanding the production.

However, just after some disbursement fits, the interest rate suddenly soared to 20 percent per annum. A lot of businesses merely got bankrupt, while their new production lines were left unused, because they could not bear such the sky high interest rates.

Businesses, which have lost confidence on the interest rate policy, have decided that they should strive for short term profits only.

A good monetary policy should not only try to increase the money supply to pave the way for the interest rates to go down. More importantly, it should strive to a stable monetary policy,” Nghia commented.

Only when the inflation rate, exchange rate and interest rate are stabilized, will businesses be able to think of their long term business plans and feel secure to make investment.

“No one can do business well, if the inflation rate goes up to 15-20 percent and down to 5-6 percent so regularly,” Nghia maintained.

He has blamed this on the abuse of the monetary policy in dealing with the problems, while the fiscal policy has been the“outsider.”

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Asset management body to be set up in bid to tackle debt

HA NOI (VNS)— The Viet Nam Asset Management Company (VAMC) will be established later this month, said member of the National Financial and Monetary Policy Advisory Council Le Xuan Nghia.

According to Nghia, VAMC will be under the management of the central bank rather than the finance ministry as funds used to handle bad debts will not come from the Government budget.

In addition, he said, VAMC should be the sole company to focus on resolving bad loans.

Nghia said the company’s establishment must also be based on the principle that commercial banks would have to sell bad debts or else they faced a thorough inspection by the central bank. However, there should be regulations on debt levels, from which banks must sell bad loans to VAMC.

Before the company is up and running, commercial banks will have to sell bad debts based on their current book value. Assets also have to remain under banks’ management.

Banks will also receive special bonds issued by the central bank and can use such bonds as collaterals to borrow money on open market operations.

Commercial banks holding VAMC bonds must set aside provisions of 20 per cent per year.

When VAMC sells its assets, the company will keep 15 per cent of proceeds and transfer 85 per cent to commercial banks, which then have to give the bonds back to the central bank.

VAMC, a 100-per-cent State-owned organisation established by the Government to handle bad debts held by credit institutions in Viet Nam, has been approved in principle by the Politburo. — VNS

Plans for sovereign bonds still far away

There still is a long way to go until Cambodia issues its first sovereign bonds, the director general of the National Bank of Cambodia (NBC) told the Post yesterday.

“Some day, we need to move into that direction, together with the Asean member states,“ Nguon Sokha said yesterday.

On Friday, she announced during the Asian Development Bank (ADB)’s annual meeting in India that Cambodia is studying the possibility of issuing sovereign bonds, supported by the ADB and the Asean+3 group that includes China, Japan and South Korea. The bonds would help the government to move away from its dependence on overseas aid.

“However, capacity building and infrastructure are the biggest technical issues. Politically, we need to strengthen the confidence in the bond market to make sure it will be successful,“ Sokha said.

According to the ADB’s Senior Financial Sector Specialist Hiroyuko Aoki, it would be a good time for the Cambodian government to improve financial stability by issuing sovereign bonds.

“The main challenge of issuing government bonds is maintaining sound fiscal management. As the budget deficit is not so significant, the risk is deemed as manageable at this moment,” he said.

Not issuing government bonds may carry far higher risks, Aoki added. “As the life insurance sector and pensions are emerging, they will be seeking long-term investment opportunities that are presently unavailable.”

He also said the government bond market is a key measure to curb domestic yields and benchmark interest rates for the corporate sector, thus leading to financial support for SMEs. It would also be a major tool for adjusting money supply.

“Government bonds can be an alternative for investments for real estates and can serve as a preventive measure for financial bubbles, especially in the real estate sector,” Aoki said.

By Sarah Thust│07 May 2013│The Phnom Penh Post

Credit rating reflects macroeconomic strain

Early this year, Fitch Ratings affirmed Viet Nam’s sovereign rating at B+ with a stable outlook. With Viet Nam determined to restructure the whole economy with a focus on the banking system, Viet Nam News reporter Mai Huong talked with Ambreesh Srivastava, senior director of Fitch Ratings’s Financial Institutions, South Asia, about the problems facing the domestic banking system.

What is Fitch’s assessment of Viet Nam’s banking system? How does it measure up to other nations in the region?

Fitch Ratings’ scale runs from AAA to F, from excellent to poor, and we have some strong banking systems in the region, like Singapore in the double A category. In the triple B category we have banks of Malaysia and Thailand. In the double B category, we find India, Philippines, China and Indonesia.

In the single B category, we have Viet Nam and Sri Lanka. Based on our scale, Viet Nam’s banking system is relatively weak compared with many other banking systems in the region.

There are several components to assess banks, but one of the reasons why the banking system here is relatively weak is because of the macro economic environment itself which is rated B+ by Fitch. That sets the backdrop for most banks, because normally banks and financial institutions are not rated higher than the sovereign itself, because of operating environment risk.

What are the problems and how serious are they?

Banks in Viet Nam have serious issues of asset quality and non-performing loans (NPLs). Some of them are reported in the public media but a large number are not reported because the total number doesn’t tell the whole story. So we make our judgement and in our view, the true NPLs and real asset quality is much weaker than what’s been reported. It could be because of an accounting standard-related issue.

Most banks in Viet Nam also have some issues with funding and liquidity, which is much more stressed than what we see in other banking systems in the region. With non dong-denominated funding, US dollar-related issues, the funding is even more tight and this is probably because the authority is trying to reduce the dollarisation in the economy. Besides, poor transparency also leads to the asset quality problem.

In February, the central bank reported the bad debt ratio declined from 8.8 per cent in mid-2012 to just 6 per cent. Do you think Viet Nam has made progress in dealing with bad debts?

The figure could be different due to dissimilar accounting standards. For example, from most jurisdictions, most of special mentioned loans can be recognised as NPLs, and in fact this figure is much higher than the official NPLs account.

Given the wide-spread problem in the State-owned enterprise (SOE) sector in Vit Nam, we think a lot of problems related to the account may not have been recognised and classsified. Taking into account other factors, we expect NPLs are a lot higher.

But the good thing is the authority is now trying to address this issue, through establishing a national asset management company to buy bad loans in the banking system, or progressively recapitalising banks and trying to put on credit caps so that banks can not make loans excessively, like they did a few years ago. However, most of these problems are not short-term solutions.

Ratings of big banks in Viet Nam are weak and they even face the risk of another downgrade from international ratings agencies. What are their problems and how do they cope with them?

The problems we’ve found are reflected in the Vietnamese banking sector. If they’re addressed and there’re some improvements, then there’s a possibility that ratings of Vietnamese banks may even go up. If sovereign rating, for example, goes up for whatever reason, then there’s a possibility that ratings of many Government-related banks, which support the sovereign rating will also go up.

On the flip side, if some of the stand-alone financial indicators become even weaker, for example, as we know, negative news happened with the Asia Commercial Bank (ACB) late last year, resulting in some franchise implications, funding issues and liquidity issues.

Our view is that when stand-alone financial strains have deteriorated, its rating B with stable outlook has now been put in B with negative outlook. Not immediately, but chances are if things would not be addressed, then there’s a possibility that the rating might be graded downward.

Ratings can go up or down and outlook shows how things can be. At the moment, other than ACB, most of our ratings have a stable outlook.

Confidence in the banking system became rather fragile after the arrest of a prominent Vietnamese banker last August. Can you suggest how to prevent such an incident?

Nobody can suggest such a measure but we can think of some indirect solutions to the problem. For example, transparency. People get cranky when such a situation occurs because they don’t know what the real problem is or the extent of it. That’s why at that time we put ACB on rating watch negative.

So that’s how financial markets work. People tend to react in a negative way to uncertainty. Because Viet Nam’s is slightly an ostrich system (less transparent), people feel less certain about how things will turn out.

So if this can be addressed I think the level of confidence will automatically go up.

Viet Nam is determined to restructure the whole economy with a focus on the banking system. How do you assess its progress so far?

It’s still early days but, as I said earlier, the good thing is that your Government has recognised the problems and is trying to address them. How you perceive and follow through the whole thing will be the key.

You have recognised the weaknesses in the banking system and the SOE sector and once these weaknesses are addressed, then chances are the overall economy will start growing at a higher rate. At the moment, it seems the authority is serious in pursuing these options and we feel optimistic. — VNS

Over VND2 trillion in Government bonds mobilised

HA NOI (VNS)— A total of VND2.1 trillion (US$100 million) worth of Government bonds was sold this week, according to the Ha Noi Stock Exchange.

VND1.75 trillion ($83.3 million) worth, or 35 per cent of the bonds issued by the Viet Nam Development Bank, found buyers on Wednesday alone. Bond yields ranged between 8.8-9.4 per cent.

On Tuesday, the Bank for Social Policies put up VND1 trillion worth of bonds ($47.6 million) but only VND350 billion ($16.6 million) was raised. The bonds yielded 9-9.29 per cent.

Since the beginning of this year, the two banks have raised nearly VND12.1 trillion ($576.1 million) through bond auctions.-VNS

Investors favour Treasury bonds

HA NOI (VNS)— Nearly 100 per cent of Government bonds issued by the State Treasury successfully found buyers on Thursday.

Accordingly, a total value of VND5.9 billion (US$280.9 million) out of VND6 trillion ($285.7 million) was mobilised. The two-year and three-year bonds yield 8.3 and 8.53 per cent, respectively.

Since earlier this year, the State Treasury has raised VND33.16 trillion ($1.5 billion) through Government bonds.

Meanwhile, bonds issued by the Viet Nam Bank for Social Policies were bought yesterday with a value of only VND250 billion ($11.9 million), yielding 9.8 per cent.-VNS