Can further rate cut boost lending?

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PHOTO: DIEP DUC MINH
A woman deposits money at a branch of the Vietnam Export-Import Bank in Ho Chi Minh City

The government is likely to heed advice from a parliamentary commission to cut interest rates further, hoping to meet its credit growth target, but analysts warn an increase in lending is not a given.

In a report published Tuesday, the National Financial Supervisory Commission under the National Assembly expressed concern over the slow growth of credit, saying Vietnam will find it hard put to meet the target of 12 percent set for this year.

It said that as of April 29, credit had increased by just 2.11 percent from the end of last year, meaning that to meet the year's credit growth target, it would have to increase by at least 1.25 percent every month.

This is an "extremely difficult" mission, given that local businesses' capacity to absorb funds is still limited, the properly market is stagnant and the global economy is weak as well, the commission said.

Therefore, it is essential that the lending rate is reduced to around 10 percent a year so businesses are encouraged to take loans, it said.

Lending rates in Vietnam now range between 11-15 percent a year.

Prior to the commission's proposal, international financial organizations had expected the State Bank of Vietnam to cut its refinance rate further this year, given the poor credit growth till date and the decreased pace of inflation. 

In fact, the organizations have lowered their inflation forecast for Vietnam after official figures showed the increase in the consumer price index was lower than expected. 

The CPI rose by 2.35 percent over the first five months compared to the end of last year, the lowest increase in four years.

For the second time this year, the CPI was down 0.06 percent year-on-year in May. The first such drop was recorded in March.

In a report also released on Tuesday, the Standard Chartered Bank lowered its inflation forecast for Vietnam this year from 8 percent to 7.2 percent.

JPMorgan Chase & Co. had previously said inflation is likely to be 6.1 percent, the lowest since 2003, while the Australia and New Zealand Banking Group anticipated it at 6-8 percent, according to a report in online newspaper VnEconomy.

"If the authorities remain comfortable with the inflation outlook and credit growth stays anemic," there is a possibility that the central bank will cut the refinance rate from 7 percent now to 6.5 percent in the third quarter, Standard Chartered said.

Since the beginning of this year, the central bank has cut the rate twice with the latest adjustment happening on May 13.

JPMorgan Chase also expected a decrease of 0.5-1 percent in the central bank's refinance rate this year.

In question 

The Standard Chartered report said that while high interest rates may be the reason for sluggish credit growth in Vietnam, whether lower rates will boost lending "remains to be seen."

It said that since 2012, the central bank has implemented several measures, including rate cuts, to make up for "economic headwinds" and boost domestic business activity, but these measures have achieved "varying degrees of effectiveness."

It said the slow lending growth also has to do with banks' concerns about their balance sheets, and borrowers' concerns about the economic outlook.

"Clearing these impediments will require decisive structural reforms," including those in the banking and state-owned enterprise sectors, and reviving the property market, Standard Chartered said.

It is "more important" to accelerate the pace of all these reforms whose progress has been "slow" this year, than to apply monetary easing measures to boost business activity and gain growth momentum, the UK-headquartered bank said.

Speaking to Bloomberg last week, Nguyen Dong Tien, said the pressure on inflation still remains, and there are "some factors" that will cause inflation to quicken toward the end of the year.

Meanwhile, Edwin Gutierrez, a London-based portfolio manager, told Bloomberg that the banking sector has "not much appetite to lend." Gutierrez works with Aberdeen Asset Management Plc, which oversees about $12 billion in emerging-market debt including Vietnamese foreign-currency bonds.

He said the sector's focus now is on the asset management company that will go into operation this July 9 under the approval of Prime Minister Nguyen Dung.

The company will buy non-performing loans from lenders and sell them at auctions. Lenders with bad debt ratios of 3 percent and above will have to sell the loans to the company in exchange for special bonds.

Managed by the central bank, the company will have an initial registered capital of VND500 billion (US$24 million).

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