Vietnam has pushed up interest rates by removing restrictions on loan rates and should now scrap limits on all types of borrowing, according to Asia Commercial Bank, the country's biggest non-state-owned lender.
The central bank last month allowed lenders to set their own rates for medium- and long-term loans. The State Bank of Vietnam previously capped loans at 150 percent of its benchmark rate, now at 8 percent.
"When they removed the limit, it means they let interest rates go higher," ACB's Chief Executive Officer Ly Xuan Hai said in an interview in his Ho Chi Minh City office Tuesday. "The signal from the central bank is very clear: they are very carefully tightening monetary policy."
Higher interest rates may ease concern that the central bank isn't doing enough to slow inflation and support the currency. A "lack of significant policy tightening" may trigger a ratings downgrade, Fitch Ratings said on March 12, putting Vietnam's debt on negative watch. Citigroup Inc. is calling for "more decisive policy tightening."
Fitch rates Vietnam's debt BB-, or three notches below investment grade. The credit ratings company cited what it viewed as a deterioration in confidence in Vietnam's currency. The government has devalued the dong twice since November.
Lending rates rise
Bank lending rates are increasing along with inflation, which quickened for a sixth month in February, with prices rising 8.46 percent from a year earlier. Inflation may peak at 11 percent this year, driven by a weakening dong and rising power and petroleum prices, UK-listed Vietnam Property Fund Ltd. said this week.
The State Bank has held the key interest rate at 8 percent since December, after lowering it from the 14 percent level it reached in mid-2008 amid the fastest inflation since at least 1992.
Focusing on the benchmark rate leads to a misunderstanding of the central bank's signals, Hai said.
"The base rate is just a figure hanging in the air, not a real transaction rate," he said. "De facto, monetary policy in Vietnam has been tightened."
Asia Commercial's loan rates have climbed to about 15 percent from around 10 percent in December, Hai said. With the removal of the cap for medium- and long-term loans, as many as 55 percent of Asia Commercial's lending portfolio can be made at negotiated rates, he said.
"We are seeing considerably more liquidity in the money markets" since the rate ceiling on medium- and long-term loans was removed, Vietnam Property Fund Ltd. said in a note this week to the London Stock Exchange.
The cap was left in place for short-term loans, restricting the maximum rate that banks can charge to 12 percent. Short-term loans are defined as up to 12 months, according to Nguyen Ngoc Bao, director of the State Bank of Vietnam's monetary policy department.
Given the current market environment, the remaining limit curbs the ability of poorer people to borrow, Hai said.
"For a high-risk borrower, without collateral, the interest rate should be higher but because of the cap, banks won't make loans to these kinds of customers," he said. "Then they have to borrow outside the banking system."