Vietnam had some good economic fundamentals last year. The economy expanded 6.78 per cent against 2009. Export earnings gained 25.5 per cent on-year, a two-fold increase against the state’s target, while the trade deficit hovered at around $12.37 billion, lower than last year’s $12.85 billion. The balance of payments deficit was estimated at $2.5 billion, far lower than the government’s projection of $4 billion and much lower than last year’s $8.8 billion.  

In 2010, inflation surged to 11.75 per cent, far exceeding the figure we predicted. Core inflation which excludes food and petroleum costs were 6.2 per cent. These figures illustrate that the monetary policy was not so responsible for inflation.  

But against such a positive backdrop, the country faced several serious problems.

Unprecedented distortions

The first problem is the distortions in interest rate policies. At commercial banks, interest rates for short-term deposits were the same as those for long-term ones, or even higher. Non-term and term deposits, high and low risk, were also treated the same. There were official and unofficial deposit rates with the latter being banks’ tactics to attract deposits.  

Such distortions were seen by international financial experts as unprecedented  in Vietnam and the world’s monetary histories. Those abnormal facts broke all theories on interest rate and term structures that say longer-term deposits bear higher interest rates and high risks mean higher lending rates.  

Another abnormal fact is that the official and black market exchange rate gap rose to hit VND2,000 per US dollar, 10 per cent of the official rate.  

The third issue is while all currencies in the world appreciated against the greenback, the Vietnamese dong moved in reverse. 

The fourth thing is while all foreign stock exchanges in the US, Europe and Asia rallied, Vietnam’s stock market experienced declines throughout the year. 

Besides, Vinashin’s difficulties in meeting its debt obligations had a huge impact on Vietnam-based enterprises’ borrowing.  

Finally, due to the country’s import quota policy, local gold prices fluctuated much more than the global prices. Whenever the quota was expanded, local gold prices dropped, otherwise it was always higher than global levels.

A great pool of greenbacks found its way into imports of gold to cash in the global and local price gap, exerting enormous pressure on the balance of payments. In contrast to the rest of the world, the majority of Vietnam’s gold reserves are kept by people with little in the central bank’s hand.  

International financial analysts said the Vietnamese economy had been seriously dollarised and goldised. Given those troubles, if Vietnam signs an agreement with China to make payments in yuan, how will the macroeconomy look? 

National Financial Surveillance Commission research on monetary pressure shows that in the medium term, it is not as bad as what Moody’ warned about a balance of payment crisis risk for Vietnam. But we have to stay alert to problems relating to the local currency under the strong impact of inflation, the trade deficit and the fact that a huge volume of greenbacks is flowing into imports of gold.

Does the economy lack money? If M2 comprises cash and bank deposits, Vietnam’s velocity of money is four. If M2 also includes gold and government bonds, the velocity is two. The velocity of money at two means the economy is seriously thirsty for capital.

Many small- and medium-sized enterprises could hardly access credit. By the end of last year, the scarcity of cash became more serious, a reason behind banks’ quickly raising interest rates to raise cash. 

If the economic foundations were not too bad, why did the local financial market have so many problems in 2010? Our commission found out that administrative measures were taking centre stage instead of economic measures to be in line with market rules.  

When authorities did opt for administrative measures, those set to be affected would resort to any means necessary to evade the negative impact of those measures.

As a result, it seems that administrative measures have been seriously violated. Breaking authorities’ regulations becomes a habit in the monetary system. This is currently the monetary system’s biggest risk. 

For instance, foreign governments use reserve hike requirements as a tough, but very basic tool, to restrict credit expansion. The US places interest rates at 0.25 per cent, while the obligatory reserve is 10 per cent. China’s reserve requirement is 17.5 per cent, while the figure for Vietnam is only 3 per cent.

If Vietnam had done the same, the central bank would have had more money to protect a group of small banks facing liquidity difficulties and keep the interbank market stable. Small banks then would not have joined an interest rate race. Instead, it went its own way. 

Under Circular 19 amending Circular 13 on bank safety ratios, effective from October 1, 2010, banks can lend up to 80 per cent of overall deposits. Circular 19 also allows banks to use only 20 per cent of non-term deposits for lending.  

Due to these circulars, the central bank does not have more money to regulate the banking system, while commercial banks sit on a huge pool of money that they cannot use for lending. Banks, thus, will put the idle money that they have to pay interest into forex trading, gold trading, lending on the interbank market or invest in other fields, which the central bank cannot control.

 Moreover, banks will find ways to disguise non-term deposits as term deposits and short-term deposits as long-term ones to expand credit.

 Meanwhile, there is no way for the central bank to check whether banks are adhering to the 80 per cent lending limit since money passes in and out quickly. The central bank is also unable to check whether non-term deposits are really non-term or long-term deposits are really long-term. The fact that banks are using short-term deposits for long-term lending is a big danger.   

Circulars 13 and 19 show the central bank’s good will to restrict credit expansion. But, the tools might not be up to its expectation while they caused great troubles regarding  transparency and credit safety.

Missions for 2011

The biggest mission for 2011 is reducing inflation, especially core inflation.

Recent global economy forecasts have very positive. Our research shows that no one is talking about a double-dip recession. This indicates the global recovery is rather firm. 

Economists once warned that the world’s huge economic stimulus packages could make global inflation swell. But the latest analyses from Standard Chartered Bank, ANZ and Bloomberg show the global inflation this year might be rather low. Thus, the possibility Vietnam imports inflation is not high.

The government targets inflation in 2011 at around 7 per cent. I think a rate of 7-8 per cent is feasible since gross domestic product (GDP) growth this year might be higher than last year, at around 7-7.5 per cent.

To rein in inflation, this year Vietnam must put the credit market into order so that we can set out exact plans on money supply and money supply management. The lessons from 2010 are very valuable.

The way credit expansion is being restricted must be amended via under-law regulations guiding the execution of the newly-amended Banking Law, based on which Circulars 13 and 19 are adjusted to be more rational. Specifically, the reserve requirement tool must be used actively.

The forex market is currently one of Vietnam’s biggest macroeconomic risks. We have dramatically improved the balance of payments. To stabilise the forex market, we need to put the gold market into order.

But the biggest problem is confidence in the local currency. Worries about the depreciation of the dong are extremely serious, not only among people, but also within the business circle and the banking sector.

There should be a reasonable gap between the interest rates for dollar and dong lending. If commercial banks bring down dong lending rates, while raising dollar lending rates, dollar lending will be reduced. Making enterprises less interested in dollar borrowing and people less interested in making dollar deposits and turn to dong deposits is the most basic measure.  

When intervening in the market, intervene strongly. Half-hearted intervention will widen  the official and black market rate gap and worsen people’s fear about the dong’s depreciation risk. The rate gap should be brought down to VND200, which is the safety level. And the central bank’s words and actions must be consistent.

Source: VIR