Dec 3, 2012

Vietnam - Interest rates to be slashed further, but what for?

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VietNamNet Bridge – It is highly possible that the State Bank would slash the deposit interest rate further--by one percent, to make it easier for businesses to access bank loans. However, economists have warned that this would do more harm than good.

Interest rates decrease further?

It is expected that the ceiling short term deposit interest rate would be reduced by another one percent to 8 percent in some days, in an effort to help push up lending and provide more capital to businesses in the year-end production season.

The current conditions all support the interest rate reductions. Investors cannot make profit when they inject money in the real estate or stock markets which have been frozen for a long time. They also do not think of buying gold because of the high risks, or buying foreign currencies, because the stable exchange rate would not bring profits.

Meanwhile, commercial banks have stopped mobilizing capital in gold. All of these factors have made depositing become the biggest choice of people for nowadays.

With the current deposit interest rates of between nine and 12 percent per annum, depositors can enjoy real positive interests, which make them feel secure to deposit money at banks. This explains why the cash flow keeps flowing into banks.

The abundant capital has prompted commercial banks to reduce the interest rates of long term (more than 12 months) deposits. Techcombank, for example, has slashed its highest interest rate from 12.5 percent to 12 percent. Eximbank has also eased the interest rates by 0.3-0.8 percent.

The latest report by the State Bank of Vietnam also showed the downward tendency in the interbank interest rate performance. Overnight interest rates stayed at 1.83 percent per annum last week, while the rates were 3.04 percent for one-week loans and 3.28 percent for two-week loans.

The liquidity excess proves to be the biggest reason that makes people believe that the lending interest rates would go down.

Vu Viet Ngoan, Chair of the National Finance Supervision Council, has been repeatedly urging banks to reduce the interest rates, saying that businesses would be able to resume their production only if the interest rates become more reasonable.

Haste makes waste

While some economists believe that easing the interest rates is the most important task for now to revive the local production, others believe that it would be better not to adjust the interest rates now, if considering the macroeconomic indexes.

An analysis pointed out that the consumer price index (CPI) would increase by more than seven percent by the end of December. As such, if slashing the ceiling interest rate to 8 percent, the real interest rates depositors can enjoy would be not attractive enough. If so, the capital would keep away from banks, thus leading to the lack of capital.

The analysis showed that there is no more room to slash interest rates further, and that if deliberating to reduce the interest rates, this may lead to the fact that Vietnamese people would refuse to keep the local currency.

Some bankers say the interest rate reductions would not have much significance. In fact, businesses cannot access to bank loans because they cannot satisfy the requirements set by banks, not because of the high interest rates.

The bankers have affirmed that they would be ready to lend at lower interest rates if businesses have feasibility business plans.

Tran Thuy

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