Vietnam's attempts to spur lending in a time of slow economic growth by easing monetary policies further could badly affect credit quality and macroeconomic stability, the World Bank has warned.
In its East Asia and Pacific Economic Update report released October 7, the bank said the country's efforts to stimulate the economy through accommodative monetary policy and tax breaks appears to have reached limits while raising fiscal deficits and contingent liabilities.
The State Bank of Vietnam has "aggressively" cut interest rates in response to the growth slowdown and falling inflation with a total reduction of 800 basis points since March 2012.
The country also introduced fiscal measures including tax rate decreases and tax payment delays.
Credit growth is slow as on one hand banks squeeze lending over concerns of bad debts and on the other hand, domestic firms have become more reluctant due to weaker business prospects. This year loans have grown by 5 percent in July compared to the annual target of 12 percent.
Bad debts at banks were estimated at 7.8 percent the outstanding loans in last year's end.
The economy has entered its third year of relative stability and the stabilization measures implemented since 2011 have helped reduce inflation, WB said.
Headline inflation declined from more than 23 percent year-on-year in August 2011 to 7.3 last July.
But the bank forecast that Vietnam could not keep prices under 6.5 percent this year, and the rate would mount 8.8 percent instead.
The economy extended its slow growth into the first half of this year with a growth rate of 4.9 percent in the first quarter and 5 percent in the second, it said.
Under such circumstances, further monetary easing is likely to have "only limited impact on growth" and could add to "concerns surrounding credit quality and negative consequences on macroeconomic instability."
Sluggish global growth and the slow pace of structural reforms has led to Vietnam's existing economic slowdown.
The country is experiencing its "longest spell of modest growth" since the late 1980s.
Last year the economy expanded 5.2 percent, the lowest since 1999. The growth rates were 6.2 percent and 6.4 percent in 2011 and 2010.
WB data revealed that nearly 29,000 businesses closed, liquidated, or temporarily suspended their operations in the first half of 2013, up 10.5 percent year-on-year.
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