Thoi bao Kinh te Viet Nam (Vietnam Economic Times) spoke to financial experts about the pros and cons of the financial liberalisation process.

Nguyen Dai Lai, vice director of the Development Strategy Department, State Bank of Vietnam

No absolute liberalisation

In my opinion, financial liberalisation is the name for a concept meant to further free up the economy by loosening regulations controlling businesses in Vietnam.

But the normal legal checks and balances will still exist, plus special supervisory tools to ensure the healthy growth of the economy.

The phrase "financial liberalisation" is a term that may mean different things at different levels, but, it can be said that businesses will not be able to run in complete freedom.

Why do I say this? The financial market consists of a monetary market [for short-term borrowing and lending] and a capital market [securities markets in which the government and companies can raise funds for long-term].

Both markets were liberalised in the late 1990s when the banking sector shifted from a state-controlled to market mechanism.

The process was achieved by loosening interest and exchange rates as well as eliminating the State's monopoly on banking and allowing joint-stock commercial banks to open.

During the present stock market boom, commercial banks will face difficulties in mobilising capital to provide loans, because so many people have switched from interest only investments to the stock market.

There is no doubt that capital will flow into high potential areas, including security company projects.

At present, there is a harmonious interface between monetary and capital markets. However, if the flow of money into the stockmarket is allowed, to develop without control, there will always be a risk of a financial crisis.

Since Vietnam embraced the Doi Moi (open-door) policy nearly 20 years ago, it has received much direct foreign investment. So far, total investment has reached US$50bil.

During the last 10 years, the foreign-investment sector has accounted for more than 25% of total annual export turnover. However, recent unpredictable changes in the stockmarket showed it was necessary to adopt cautious measures for liberalising current accounts and capital accounts.

Nguyen Van Lich, Director of Trade Institute (Ministry of Trade)

Ensuring financial security

Two major issues should be taken into consideration when carrying out financial liberalisation. First are the macro-economic policies.

Non-performing loans by state-owned enterprises should be reduced and their competitiveness improved. An effective measure in the long term will be to eliminate state subsidies for state-owned enterprises.

Although Vietnam's currency exchange policy has been adjusted, its currency is still highly evaluated against other currencies in the region. This decreases the competitiveness of Vietnam's exports and causes disadvantages for trade and current balances.

In its investment policy, the Government should encourage investment in the export sector. However, it should shift from protecting manufacturers who produce import substitutes to encouraging investment in export-oriented sectors.

For trade policy, development should be adjusted to meet the requirement of the world Trade Organisation (WTO ) and the ASEAN Free Trade Area (AFTA). Specifically, tax policy should be more transparent and the tariff system gradually simplified.

Customs procedures and the granting of import licences should also be simplified and many more businesses encouraged to take part in export-import activities.

The export of goods and services should be further promoted together with the growing amount of processed industrial and hi-tech products. However, the export of raw materials and unprocessed products should be reduced and more value-added processing done in Vietnam.

Experience throughout Asia has shown that nations should encourage development of all exports with an advantageous edge, not just a few selected by government officials.

Nguyen Quang Minh from Vietcombank

Pressure on banks

Despite adjusting to international rules, the Vietnamese legal system controlling banking has proved insufficient.

For instance, the State Bank of Vietnam has implemented a road map for liberalising the exchange rate with caution and flexibility.

Under this, it decided, under rule 546/2002/QD-NHNN, to carry out absolute liberalisation of exchange rates, the mechanism for negotiating credit loans and interest rates, and for forming loan-interest rates on the basis of financial market supply and demand.

Meanwhile, article one of clause 476 of the Civil Code promulgated in 2005 regulates that loan interest will be negotiated by both sides in property-loan contracts. But interest can not exceed 150% of the interest rate stipulated by the State Bank.

The regulation applies a ceiling on interest rates contrary to the tendency for interest liberalisation and therefore causes difficulties for commercial banks.

By implementing open-door policies, Vietnamese commercial banks face the challenge of competing with foreign banks and foreign financial institutions.

Under Regulations made by the General Agreement on Trade and Services (GATS), domestic banks are required to carry out transparent and safe credit activities, such as a minimum safe rate of capital, risk prevention funds and debt classification standards.

Vu Dinh Anh from Financial Science Institute, Ministry of Finance

Risks and solutions

Along with the great benefits of the financial liberalisation process, there are side effects.

A financial crisis may occur if the process is carried out without other macro policies and the domestic financial market could be controlled by outside influences. This could mean the Government could lose the ability to realise its socio-economic development targets for the nation.

According to economists, the risks of financial liberalisation include, firstly, rampant devaluation because of improper policies controlling exchange rates and the transfer of overseas capital by foreign investors.

The answer to this is to have enough reserves of foreign currencies, such as mainland China, Hong Kong and Singapore had in the financial crisis 10 years ago.

The second risk is capital outflow due to a lack of control measures on short-term capital. To cope with this risk, Vietnam can learn from Chile, which applied a policy that makes foreign investors keep their cash in the country for at least a year.

Foreign financial investors also have to pay a tax, depositing 30% of their total loans into a reserve fund without interest. Chile also imposes a tax of 1.2% on the total investment capital.

Moreover, restrictions on exchanging foreign currencies also helps prevent money outflow.

Another, risk is that bankruptcies can occur because of short-term loans for long-term investment, as happened in Thailand. The risk is more serious if there are major changes in exchange rates, real-estate prices - especially the value of bank mortgage property - and the price of equities.

In order to deal with the risks, the Government should have an effective financial supervision system to prevent high-risk investment portfolios.

Limiting foreign-currency exchange and strictly controlling overseas short-term capital inflows are also measures the Government can apply.

The biggest worry for any country introducing financial liberalisation is the fear of losing its own sovereignty. The risks are high when an upheaval happens, because governments often have to give up some economic targets, tighten budgets, reduce growth targets, cut off social subsidies and accept foreign assistance.

Nguyen Duc Hieu, member of management board of Visecurities Company

Investment channels enlarged; no concern about capital outflow

Many people are concerned that financial liberalisation will create several risks, such as capital outflow as happened in Thailand in 1997.

However, I think if money flows into an effective investment environment, there is no need to worry about an outflow.

Vietnam's economy has been developing and maintaining its growth rate for several years. This is an attraction to investors. Besides, the economy also needs the capital for the growth.

The fact is that increased money supply from foreign investment has helped speed up the equitisation process in State-owned enterprises.

A year ago commercial banks were in a race to increase interest rates to attract more capital. But in recent months, the banks say they have a surplus of capital. Of concern is how the capital will be used.

When capital resources are profuse, enterprises have to fiercely compete for investment opportunities. This leads to an increase of production costs and capital stagnancy and is reflected in bank and bond interest rates.

This year, the treasury bond interest dropped to 7.15% compared to 8.75% last year.

If there is no effective investment channel to alleviate capital stagnancy, capital supply will decrease and the financial system will be in danger if facing financial shocks from outside.

Source: Viet Nam News