Continued deepening of financial markets through development of the capital markets will strengthen monetary policy transmission, according to the Asian Development Bank
Nonperforming loans remain a critical issue for the banking sector this year, and have reinforced the need to carry out comprehensive reforms of the sector, Tomoyuki Kimura, the Asian Development Bank's country director for Vietnam, tells Vietweek.
Vietweek: What is your assessmentof Vietnam's socioeconomic achievements in 2012?
Tomoyuki Kimura: Vietnam is a global development success story. Market-oriented reforms have been successful in sustaining high economic growth and reducing poverty. Following impressive track records of rapid economic growth and remarkable poverty reduction over the past two decades, Vietnam has been recently classified as a lower middle-income country. But challenges remain. Persisting poverty particularly in remote and disadvantaged areas as well as inequality among different income and societal groups continue to be a concern. The country is also facing longer-term, more structural constraints caused by inefficient public sector management, shortage of skilled labor, and infrastructure bottlenecks.
2012 has been a notable year. We commend the government for restoring macroeconomic stability and bringing down inflation even faster than expected. The government responded to previous economic downturns with countercyclical policies that pushed hard to revive growth to meet targets but usually reignited inflation and delayed financial and corporate sector reforms. This time we commend the government for showing a greater degree of restraint and stronger emphasis on macroeconomic stability and structural reforms to place the country on a sustainable growth path rather than near-term measures to lift the economic growth.
With its unique advantages and value addition, the (ADB) actively supports the ongoing efforts by the government to accelerate economic restructuring, with focus on the financial sector, state-owned enterprises, and public investment.
ADB has forecast the 2013 inflation rate in Vietnam to be 9.4 percent. What are the factors that could trigger higher inflation?
In the latest Asian development Outlook released in October 2012, year-end inflation in 2013 was forecast at 9.4 percent, higher than that of 2012, because global food prices were projected to increase in 2013, domestic demand to trend higher, and fiscal policy to likely be relaxed. In addition to that, the favorable base effect on food prices seen in 2012 was fading. If these factors move too fast, they would push up inflation. The inflation forecast for this year is lower than previously anticipated because of the successful suppression of inflation in 2012, the downward revision in GDP growth for 2013, and the assumption that policy easing will remain moderate.
How should the monetary policy be managed to deal with it?
Curbing inflation requires a combination of various macroeconomic policies, not monetary policy alone. Addressing financial sector vulnerabilities and resolving the problems of weak banks will be the first step toward creating an environment that allows monetary policy to be effective. It is crucial that the authorities further enhance the capacity to forecast inflation and maintain a consistent monetary policy stance, and communicate such information effectively to the market. Continued deepening of financial markets through development of the capital markets will strengthen monetary policy transmission.
Administrative controls create distortions and parallel informal markets... the State Bank of Vietnam should consider phasing out these controls.
Curbs on credit growth and hikes in reserve requirements may be effective in the near-term but longer-term financial deepening will enhance the effectiveness of open market operations. Administrative controls create distortions and parallel informal markets, implicit deposit rates, and unofficial exchange rate, etc. Because these distortions reduce the efficiency of the financial sector and impede the effectiveness of monetary policy, the State Bank of Vietnam should consider phasing out these administrative controls as the financial sector deepens, relying more on open market operations.
There is also a significant administrative cost to imposing these restrictions. Further improved dissemination of monetary and banking information will also help build public confidence.
What are the biggest challenges faced by Vietnam this year?
It is the banking sector. Nonperforming loans are one of the most critical issues for the financial and banking sector in Vietnam this year. The ratio of nonperforming loans to total loans increased to an estimated 4.5 percent in May and the central bank acknowledged that the figure could be close to 8.6 percent.
Rapid growth in lending over several years, followed by the squeeze on credit in 2011-2012 and exacerbated downturns in the property and equity markets have added to stresses for banks. Rising NPL ratios and the risk profile of some bank balance sheets, particularly those with exposure to unprofitable and overstretched state-owned enterprises raises questions about capital adequacy, particularly for small banks.
Cross-holding would also become a challenge if it is not monitored and carefully regulated. This has been the case in the past which has resulted in uncertain banking-sector risks. Banks should disclose their existing cross-holding exposures. If the existing risk is high then there needs to be a framework in which commercial banks may divest to reduce exposure.
The dangers are compounded by shortcomings in risk management at banks and weaknesses in the regulatory and supervisory framework. The growth outlook centers on these financial sector risks that could intensify until the NPL problem is addressed decisively. We hope a comprehensive action plan underpinned by sufficient resources will be developed and implemented as early as possible in 2013.
What are your recommendations to the State Bank of Vietnam on monetary policy this year?
As said earlier the inflationary pressure remains in 2013. The SBV needs to closely monitor this to take timely measures.
While addressing the immediate issues of the banking sector, we encourage the SBV to continue its efforts to further strengthen its capacity to regulate and monitor banking sector risk. In particular, enhancing the SBV's capacity to forecast inflation, maintaining a firm and consistent policy stance, and communicating such a position effectively to the market are very crucial. Further improved disclosure of monetary and banking information would also help to build public confidence.
Because curbing inflation requires a combination of various macroeconomic policies, close coordination between monetary and fiscal policies is very crucial, among others.
Merging weaker small banks was an important step this however does not resolve the underlying NPL problem. The government needs to implement comprehensive banking sector reforms, and deal quickly with comprehensive NPL resolution measures in particular so that public confidence in the banking system is not affected. Providing more details on funding and timing of bank recapitalization would help. The capital adequacy ratio may need to be raised for the entire system to reduce vulnerabilities.
Finally, a move toward international standards for bank loan classification and provisioning is also recommended to help strengthen banks' stability.
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