In the year to date, inflation in the nation has been low, with a rise of just 2.37% from late last year compared to an increase of 3.35% in the same period last year. Nghia said yearly inflation was normally double the first-quarter number.

Therefore, Nghia forecast, the inflation rate in 2012 will be much lower than expected, at roughly 6.5%. “The banking system should have pulled down interest rates in line with the fall of inflation but they have yet to do so due to the liquidity crunch,” Nghia noted.

In fact, larger lenders are holding ample capital as they have invested heavily in Government bonds with terms of less than five years to net a coupon of below 12% annually, Nghia explained.

In related news, Bao Viet Securities Co. reported that the total transaction volume of the whole bond market from February 13 to 17 reached VND1.81 trillion, up 81% against the previous week. Notably, the majority of investors joining the market are local credit institutions.

Liquidity woes in reality are only problematic for a number of smaller banks, but this has hampered the economy and the road map to cut rates at the request of the central bank, Nghia pointed out.

He attributed the situation to local residents’ doubt of the effectiveness of macroeconomic stabilization policies and the credibility of the banking system.

Those local lenders struggling to lure depositors tend to reject borrowers to minimize credit risks, he said. Meanwhile, many borrowers have found banking loans out of their reach because of high rates, he stated.

As a result, Nghia said, the cash flow has been choked off and has created little added value.

Nghia believed liquidity problems won’t be solved drastically within the first quarter. He insisted the problems must be handled in a thorough way throughout the year, especially in the third quarter.

Nghia cited some solutions to improve liquidity at local lenders, including speeding up capital circulation. Capital flow in Vietnam in the period prior to the financial crisis had been three cycles a year but it fell to 0.8 last year.

To improve capital flow, Nghia suggested the central bank should regulate capital via compulsory reserves and promptly merge weak banks with one another. He even urged the authority to allow some lenders to trade gold deposits on international markets.

The central bank should restructure bad debts as soon as possible since the current capital shortage at local banks has resulted from bad debts, he added.

Source: SaigonTimes