Interest rate cuts continue amid easing inflation

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Staff employees count money at a branch of the Bank for Investment and Development of Vietnam in Hanoi last week. The central bank has cut policy rates four times this year.

The State Bank of Vietnam's decision to cut interest rates for the fourth time this year could help revive the economy which is expected to grow at the slowest pace in more than a decade.

Effective June 11, the central bank cut the refinancing rate to 11 percent from 12 percent, and the discount rate to 9 percent from 10 percent.

But these cuts may not be enough though more are expected this year as inflation continues to slow down.

The other factors prompting the cuts are banks' improved liquidity and large demand for credit from companies, the central bank said in a statement.

Inflation eased to 8.34 percent year-on-year in May, the lowest level since August 2010. Last year it had soared to 18.58 percent.

Nguyen Van Binh, the central bank governor, estimated it to be at 7-8 percent for this year.

An economist, who wished to remain unnamed, said the rate cuts are essential to boost the economy, which grew by just 4 percent in the first quarter, the slowest rate in the last three years. Full-year growth is estimated at 5.2 percent, the lowest level since 1999.

However, the rates have been cut too quickly, which could see lending rise, he said. But with demand for goods and services still sluggish, it could send bad debts spiralling.

The central bank earlier cut rates in March, April, and May.

In addition, inflation could rear its head again if monetary policy is loosened too soon, the economist said, adding that Vietnam should prioritize curbing consumer prices over further rate cuts.

Truong Van Phuoc, general director of Eximbank, said though big rate cuts could be a good way to boost credit growth, it is only estimated to grow by 10-12 percent at his bank this year, against an assigned rate of 17 percent.

HSBC issued a report last Friday which says despite the recent spate of rate cuts domestic demand remains weak, as evidenced by the 0.7 percent drop in outstanding credit levels between April and the end of 2011.

This suggests that inflation risks are low.

The government last week cut fuel prices by 3.5 percent in response to falling international crude prices, further dampening inflationary pressures.

BIG PROFITS

Despite negative credit growth, many commercial banks reported big profits in the first quarter of this year. This is a paradox since lending remains the biggest source of income to banks in Vietnam.

According to local media, Eximbank saw negative credit growth of some 7 percent but profits soared 48 percent over a year earlier to nearly VND1.5 trillion (US$72.1 million). HDBank also saw profits of VND140 billion despite a 5 percent decline in loans.

Some bankers said the profits are not very big compared to their equity, which runs into tens of trillions of dong. Banks also earn revenues from other investment and financial services.

But economist Bui Kien Thanh warned: "The big profits may be only on paper since many banks have not declared their actual bad debts for fear of being forced to increase reserves against loans."

The central bank has said bad debts may account for 10 percent of total outstanding loans, but the real rate may be higher, he claimed.

"On the surface, the timing of this fourth cut may seem a little aggressive and premature. But given the recent rapid deceleration of inflation and still extremely squeezed credit conditions, the cut was warranted," the bank said in its report.

Economist Bui Kien Thanh said: "We should not worry too much about the rate cuts since credit growth has been negative, and inflation has been curbed.

"The rates should be further lowered. At these rates, firms could remain in business, not expand."

The short-term lending rate has been lowered to 12 percent for some sectors, according to the central bank.

Thanh said the high interest rates eroded local firms' competitiveness. Foreign companies could borrow from banks in their own countries at very low interest rates, for example, at only 2-3 percent in the US, he pointed out.

"The central bank should offer commercial banks loans at 3-4 percent interest rate so that they could relend to firms at 7-8 percent.

"High interest rates should be imposed only on consumer credit."

The central bank has also lowered the dong deposit rate to 9 percent from 11 percent effective June 11.

The head of a Hanoi-based lender said his bank's credit activities have remained unchanged since the rate cuts were announced last week. "The stock and property markets have not yet rebounded, while gold and foreign currency have not seen sharp increases. Thus, bank deposits are still the choice of many people."

From 2000 to 2007 the deposit interest rate was above 6 percent, while inflation was 4.6 percent on average, but banks still saw deposits rise, he said.

"There is no reason for worrying about people withdrawing money from their savings accounts."

Difficult to get credit

Tran Thi Hong, director of electrical and home appliances seller Phuong Hong, said all companies are interested in the rate reduction, but it is not easy to get bank loans.

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Her company had sought loans from some banks, but none agreed to lend. "We have to repay existing loans before seeking new ones. However, it is very difficult since sales remain very slow."

Still struggling to pay over VND50 million (US$2,380) a month after getting a loan of nearly VND4 billion last year, Nguyen Van Phong, director of a small manufacturing company in Hanoi's Hoang Mai District, said he does not think of borrowing any more.

"We mortgaged our assets for previous loans, so we don't have anything left to mortgage for new ones. Even if we can get a loan, we dare not borrow because of our very sluggish sales."

The biggest difficulty facing firms now is not a funds shortage but lack of demand, he said, adding the government, besides cutting rates, should also find ways to spur consumption.

Pham Thien Long, deputy general director of HDBank, said: "We have cut rates, but it is still difficult to lend to firms. There are not many good customers to offer credit now."

He said banks should carefully consider their lending to avoid bad debts, which are rising amid the unfavorable business conditions.

Further cut expected

HSBC said even with the impact of recent easing measures expected to filter through in the third quarter, inflation is expected to slow further to less than 5 percent in October.

It thus expects the central bank to cut rates by a further 2 percentage points this year.

Thanh, the economist, said it would be quite normal to cut the rates by another 2-3 percentage points if inflation is kept at 5-6 percent this year.

But deputy governor of the central bank, Le Minh Hung, said the bank would keep the interest rate unchanged this year.

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