The Saigon Times Daily: What was your immediate response when the Vietnamese Government issued Resolution 11 to curb inflation, stabilize the macro economy and ensure social security? 

- Louis Taylor: We were completely supportive to this resolution. But the fact that this can be a good medicine for the economy doesn’t mean it would make the patient feel better in the short term. So there will be some short- term issues and maybe intermediate-term issues but the direction of policy is right.

- From a banking perspective it certainly put the brakes on many things we were allowed to do and it also changed the nature of banking activities. If you have banks that are not well capitalized and are lending to non-productive sectors such as real estate and stock market, those banks should be discouraged from expansion. But having every bank limited under the 20% perhaps is not the only way to limit credit growth. I think that the State Bank (of Vietnam) recognizes this and will pragmatically change in order to cope with the reality.

Do you think loan rates are too high now?

- The rates are high for companies, because they have to generate the return to pay those interest rates. That is a difficult situation. But we are in a difficult situation here in Vietnam. If rates are eased too soon that is a bad thing because nobody will have confidence that the Government and the State Bank of Vietnam can take things under control. Naturally, relative to loans in Singapore or in the U.S., interest rates are very high here. Relative to what is needed for the economy to slow down credit growth, interest rates are not as high. In fact, with an annual inflation rate at 17% in April, the base rate and the open market operations rate are not extreme.

Do you mean interest rates should be higher even if firms suffer?

- I do not believe in raising interest rates further. The Government and the State Bank of Vietnam still have some policy measures they can use. They also have to make sure they will apply current measures for long enough in order to get inflation under control.

You have said recently that in the next three to four months, there’s very little, if any, chance of another devaluation. Could you explain why?

- Devaluation makes imports more expensive. There was a big devaluation in February which released a lot of pressure in the market, but the Government and the State Bank are clearly focused on reducing inflation and increasing confidence in the currency and stabilizing it. The dong interest rates are raised to do that, amongst other things. They also limited the interest rate on dollar deposits to 3%. And if you can get 14% on your dong deposits and only 3% on your dollar deposits, why not take the 14% of the dong that is going to stay stable? It is unlikely that there is another devaluation of the dong, for the next few months.

So, when, according to you, inflation would get lower?

- We have to wait until next year to see enough positive results. I don’t know exactly when the inflation will be lower but do believe it will happen by the end third or fourth quarter next year. Electricity price subsidies have been reduced: that is going to make inflation look horrible but it reduces government deficit. That can appear worse than it really is, but in fact it confirms the medicine of the Resolution 11 is already working.

The Government measures taken so far are for short term issues. The problems faced by the Vietnamese economy are still there. What can we do next to resolve them?

- It’s important to get stability into the economy first, and then the Government can start focusing on structural issues: how to create more jobs, improve productivity, and increase exports. And also on other needs: infrastructures like electricity, roads and ports. These infrastructures will allow the private sector to flourish.

But what should be the priority? Educational or administrative reforms?

- Administrative reforms can be quite quick, educational reforms will take several years to work through, infrastructural goals also can take several years to be achieved. The priority in the short term should be administrative reforms, which means not just taking away bureaucracy, but also setting up the structure that will allow private investments in education and infrastructure. 

For now, the mechanisms that allow private investments to come in and have sensible returns are not really working: the number of realized projects is not as high as everybody would like. We need a greater liberalization of the economy. In the electricity sector, for example, it is important for a private investment group to know that they can set a price for the electricity which would allow them to cover cost and to generate some kind of return. Reducing electricity subsidies should be an important step because, even if it makes inflation look worse, it is the right thing to do. If you have distortions like subsidies, things are priced on the base of these distortions and that makes the economy uncompetitive.

Source: Saigon Times.