Bond issuances put pressure on bank interest rates

Why did bank interest rates slightly increase this year?

As of early May, 2016, nearly VND111.8 trillion ($5.1 billion) was raised for the state budget through government bond issuances, helping to offset over-spending and feed development investment projects. In this situation, banks had to raise their mobilising rates to attract depositors.

In reality, current mobilising and lending rates in the banking system have inched up one percentage point against late 2015. There have been a multitude of factors behind this move but in my view it was chiefly because the Ministry of Finance (MoF) had stepped up efforts to raise capital through bond issuance, piling pressure on the monetary market.

What is the real cause behind this movement?

As state budget actual expenditure has surpassed the collected total, to increase investment there is no way other than to issue government bonds to attract capital. Approximately VND96 trillion ($4.4 billion) was expected from this to manage the debt rollover target.

Various banks, using capital from the general public, have opted to buy the government bonds, in fact 80-90 per cent of the bond volumes were purchased by banks. This is because the bond yields were attractive and banks considered their purchases of government bonds to be a safer and less costly investment channel then lending firms. Firms, consequently, had to borrow at a higher rate for production and business activities.

Experts are worried that the bank interest rates might further rise if there were no improvements to the aforementioned situation. Is this the case?

Over the past three years, the MoF has been proactive in restructuring government bond related debts by extending the lending duration. In most cases government bonds now span over five years while bond yields have been softening gradually, compared to the 2010-2013 period. This helps to alleviate the pressures tied with raising capital through government bond issuance.

In addition, the MoF is tightening government guarantees to help firms and some banks (such as the Vietnam Development Bank and Bank for Social Policies) raise capital, helping to cool the rate-driven competition in the monetary market.

However, from July 1, 2016, after the Law on State Budget 2015 came into force, the local budget’s outstanding loan balances could be expanded, prompting localities to increase bond issuances to invest in projects under medium-term investment plans. This may put pressure on the monetary market again as banks may have to raise the deposit rates to remain competitive with the bond yields offered by local governments.

What must we do in the medium and long-term to address the capital dilemma?

The Ministry of Planning and Investment and the Ministry of Finance are finalising the medium-term investment plan and medium-term financial plan under the principle of closely supervising state budget usage and maximally saving recurrent spending, etc.

In my view, localities are allowed to expedite investment development projects only when they are effective in saving regular spending as well as cutting off unnecessary investment plans. It is also important to mimimise the use of government bond capital for investment development projects on the part of localities.

In the coming term, the central bank (SBV) must keep a close watch on the domestic and international financial and credit markets and govern the monetary and credit policies flexibly, in coordination with fiscal policies, with the aim of stabilising the interest rate. It must focus on production and business activities while improving credit quality.

The MoF needs to maintain its initiative in carrying out fiscal policies and join hands with the SBV in setting suitable government bond issuance volumes and timelines to ensure macro-economic balance and public debt security.