Stacks of money at a bank in Hanoi
The recent deposit interest rate cuts have been too minor for investors to pull out their savings and switch to other asset classes, economists said.
This is especially true since the gold and stock markets have been too volatile and the real estate market is in a slump, they said.
The State Bank of Vietnam has been lowering the deposit interest rate cap in the last few months, with the latest cut, last Friday, taking it down to 7 percent from 7.5 percent, to reduce banks' funding costs and allow them to lend at lower rates.
The ceiling on dollar deposits has also fallen to 1.25 percent from 2 percent for individual depositors.
An official from commercial bank VIB said the rate cut of half a percentage point is too small to persuade depositors to take out their money. Moreover, many banks were offering deposit interest rates of only 6-6.5 percent even before the rate cut. "So, the new cap would not affect deposits."
Many lenders like SeABank, Sacombank, and Eximbank report that their deposits have not shrunk since the lower caps came into effect.
Nguyen Hoang Hai, general secretary of the Vietnam Association of Financial Investors, said: "Investors with spare cash will still make deposits since it has more advantages than other assets."
It is now too risky to buy gold since prices are fluctuating wildly and far outpacing global prices, he said.
In fact, many investors have suffered big losses after investing in the precious metal over the last two years, he said.
Gold traded at VND37.5 million (US$1,785) per tael of 37.5 grams Tuesday, VND5.3 million higher than the international rate.
Meanwhile, there are no signs of recovery in the sluggish property market though the government, to revive it, has pumped VND30 trillion into the banking system to provide low-cost loans to home buyers and developers.
And the stock market is barely a better option.
It is unlikely to continue growing rapidly like it did since late last year, Quach Manh Hao, head of the department of finance and banking at the Hanoi National University's Economics University, said.
The benchmark VN-Index rose 67.4 points, or 16.3 percent, in the first half of this year, compared to a rise of 17.7 percent in the whole of 2012.
Hao said the market is now waiting to see the effect of the government's measures to deal with bad debts and revive the economy, and so is unlikely to rise sharply.
Considering all options, saving money in banks is now the safest, and would be the choice of many people, and even firms, he said.
The rate-cap reductions are intended "to keep deposit and lending rates at reasonable levels to help stabilize the money market and foreign-currency market and to continue implementing measures to help resolve difficulties for businesses," the central bank said in the statement.
"Businesses still have a lot of difficulties because demand in the market is still low and companies' ability to absorb bank loans is still limited."
Hao said he doubts if the move will be as effective as expected. "The matter now is not quite about reducing lending rates, but about the economy's ability to absorb capital," he said.
Companies do not want to borrow when demand is weak and inventories remain high. Credit in the five months through May 31 rose 2.98 percent, compared with 0.56 percent increase a year earlier, according to the central bank.
The government is aiming for a 12 percent expansion this year.
"Businesses now need to have existing inventories cleared rather than funds for expansion," he said.
Nguyen Anh Tu, manager of a factory that makes machinery parts in Hanoi's Quang Minh Industrial Park, said his firm has been offered credit at 10.5 percent, much lower than the 16-17 percent six months ago, but it has refrained from borrowing amid its struggles.
"Orders from our customers have decreased by 25 percent over last year, so we do not think of borrowing capital for expansion," he explained.
What his company and many others need at present is to clear stocks and increase sales, so the government needs to stimulate consumption, he said.
Hongkong and Shanghai Banking Corporation Limited said in a recent report the domestic market was the principal source of demand weakness in June, as new exports fell only slightly.
With inflows of new work from both domestic and foreign sources deteriorating, manufacturing is also substantially reduced.
The sharp reduction in inflows of new business also led to a build-up of stocks of finished goods in June. Inventories rose at the fastest pace in a year. This replenishment of stocks may also reduce the need to raise production in coming months.
Deputy governor of the State Bank of Vietnam, Nguyen Dong Tien, said further interest rate cuts are unlikely this year since inflation remains high.
Vietnam's inflation edged up in June, marking the first increase in eight months after the government cut interest rates. Prices rose by 6.69 percent this month, up from 6.36 percent in May, according to the General Statistics Office.
The government targets 5.5 percent for the year after a 5.03 percent pace last year, the slowest since 1999.
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