Keeping cash flows away from non-manufacturing fields

Mr Hien pointed out that if lending rates at Vietnamese commercial banks are at 18 percent from now until the end of the year, the economy and companies will have a very good capital source

On the sidelines of a seminar on impacts of monetary policies on banks and businesses held in Hanoi by the Vietnam Chamber of Commerce and Industry (VCCI), reporter interviewed Mr Dinh The Hien, Director of Applied Informatics-Economics Institute, on cash flow trends in the context of decreasing interest rates.

Mr Hien pointed out that if lending rates at Vietnamese commercial banks are at 18 percent from now until the end of the year, the economy and companies will have a very good capital source. Lending requires efforts of banks plus companies’ ability to use money. Or else, money will flow into banks and through backchannels enter the property market. This will endanger the economy and threaten the objective of increasing money to anchor production development.

What are your opinions about the current trend of decreasing interest rates in Vietnam?

Lowering interest rates on Vietnamese dong-denominated loans will unfreeze credit flows for production and business activities. The August consumer price index (CPI) of 0.9 percent, the lowest monthly growth, is a good sign. And, if CPI growth is controlled on low grounds, interest rates are likely to ease to the rates as expected by the Governor of State Bank of Vietnam (SBV). Besides, the SBV’s regulatory instruments like pumping money onto the open market and amending Circular 19/2010/TT-NHNN are flexibly applied on the interbank market; thus, I think the lending rates of 18 percent are highly likely towards the end of this year.

What do you think about money supply of banks in the coming time?

Vietnamese commercial banks are allowed to lend to the economy around VND238 trillion in the last four months of this year, or VND47.6 trillion a month, doubling the monthly amount in the January – July period. Money supply was estimated at nearly VND300 trillion in the last five months. Credit growth in the first seven months was relatively low on high lending rates, leading to a sharp drop in money supply ad credit from the same period in 2010. Hence, the room for credit growth is wide in the last months of the year. A reduction in input costs in favour of lowering negotiation-based lending rates will help banks unfreeze credit flows.

How will money flows move if interest rates are reduced?

In my opinion, we should have two cash flows: one is directed to food production and another is channelled for consumer lending. If these two flows are stable, there is a correspondence of money and goods. As a result, CPI will be curbed. But if we do not direct money flows in this way but throw money to the real estate market, an imbalance of money and goods will result, leading to a rise in CPI. In the end, companies will lose.

Are interest rates likely to quickly fall to a new, more affordable level?

In my opinion, slashing interest rates to unfreeze credit flows is necessary but this move needs to be closely controlled. We ought to open the degree of aperture step by step rather than in a crash. Thus far, we can only confirm that there will be no rise in deposit and lending rates but the scope of reductions needs more time to be confirmed. However, it is certain that a fast cut is unlikely.

The speed of rate cuts depends on four state-owned banks because they supply most credits. If the SBV supports them, the possibility of rate cutback is high. Nonetheless, if banks only rely on normal capital mobilisation channels, the reduction is hardly likely.

Does the money supply affect the Government’s objectives of credit crunch policy in disfavour of public investment and non-manufacturing fields?

I think it is vital to balance all factors because CPI growth is partly attributed to an increase in money supply, but over-tightened monetary policy will bring about illiquidity. Control is critical to provide money for places in need and definitely tighten control over cash flows into real estate and State-funded suspended projects. In the first seven months of 2011, the Government advocated a policy that channels capital into manufacturing sectors, particularly SMEs, but not much money has flowed into such sectors.

Source vccinews

Tags: Vietnam banking industry, Vietnam finance, Vietnam financial