4 steps to a better economy

Le Xuan Nghia, member of the National Advisory Council for Monetary Policies, suggests four guiding principles for navigating the economic ship of state in the new year.

In 2012, despite the government’s support on credit, taxes, etc., the economic picture in general remained bleak. Economic growth in 2012 was about 5.03 per cent, this is the lowest since 2000.

Therefore, if Vietnam cannot handle non-performing loans (NPLs), and the banking sector and state owned enterprise (SOE) restructuring, we can fall into a long-lasting low-growth cycle.

To address the economy bottlenecks in 2013, four solutions need to be implemented.

First, continue stabilising the macro-economy and controlling inflation. The outstanding achievement of Vietnam in 2012 was bringing inflation from over 20 per cent in 2011 to 6.6 per cent. However, it should be noted that this is resulted from the decreasing food price index from January 1 to September 2012, and the declining foodstuffs price index from March to October, 2012.

Holding 40 per cent of the goods basket of Vietnam, lower food and foodstuffs prices play a decisive role in reducing inflation. We can see it very clear when the General Statistics Office reported the basic inflation index (excluding the food and foodstuffs prices) in 2012 was still very high, about 11 per cent. Thus, the tight monetary and fiscal policies contributed a lot to bringing inflation down. But if there had been no decline in the prices of agricultural products, it would have been very difficult for current inflation to be less than 10 per cent.

Addressing non-performing loans in the local banking system is a key task for the State Bank
of Vietnam in 2013

Therefore, the risk of high inflation returning, including rising food and foodstuffs price, is not small. At the same time, the task to stabilise food and foodstuffs supply not only a matter of national food security but also of the macro-economic stability in Vietnam’s current situation.

To achieve the inflation target of 6 per cent in 2013 set by the prime minister, beside pursuing prudent monetary policy, it is necessary to have synchronic policies in managing prices of food and foodstuffs, petrol and public services to control inflation more firmly in 2013.

Second, in order to restore the country’s economic growth, the biggest priority is improving the operation of enterprises. Enterprises providing goods and services in the domestic and export market is the core force to maintain the current economic and employment growth, so their difficulties need to be solved for enterprises to develop.

The reduction of interest rates and continuous stable capital pumping (including medium and long-term capital) continue to play a particularly important role in reducing cost for enterprises, increasing exports, boosting sales, reducing inventory, creating more jobs and encouraging investment in technological innovation.

However, the reduction of interest rates must complement the inflation trend, and encourage enterprises to strengthen their equity capital to hedge against risk.

For enterprises having moderate operation and NPLs, which makes them not able to access bank loans, it is necessary to have solutions helping them access loans and restructure debts. In such a way, they can get funds if their business projects are effective, especially when they have good consumer contracts or export orders. Then, they can get new funds but still guarantee old loans payment obligation and step-by-step settlement of  overdue debts.

The government should stimulate the operation of the small and medium enterprises (SMEs) guarantee funds. Then SMEs can get capital when their guaranteed projects are evaluated and approved for loans by commercial banks.

Third is a real estate market recovery. Rescuing the real estate market is very complex and associated with a general economic recovery. In developed countries, the real estate market is not distorted by administrative procedures like the “red book” (land use right certificates) and inadequate tax system; the rescue depends mainly on measures that encourage home ownership with a reasonable interest rate and ownership term. For example, in the US it is 30 years, and in Switzerland it is 50 years.

In Vietnam, the interest rates for home loans in the range of 9 - 10 per cent per year, term of 15 to 20 years, and can be adjusted based on  inflation would be a strong incentive to increase the demand for apartments worth VND1 billion ($48,000) or less.

Fourth is the NPLs problem. Handling with NPLs has started since the beginning of 2012 and been mainly carried out by the commercial banks based on rescheduling loans but maintaining debt classification. However, in reality, this measure only temporarily supports enterprises to maintain credit relations with banks in a limited extent, and the main principle of rescheduled debts is still NPLs. Thus, the NPLs are basically untreated. The handling of NPLs can be carried out by establishing an asset management company or directly injecting capital to banks, or a combination of both measures.

The selection of which measures depends on the ability to handle the legal and technical obstacles in practical conditions today.

 In principle, resolving NPLs must achieve such goals as stimulating enterprises’ ability in accessing capital, handling a large proportion of inventory, strengthening the financial capacity of the banking system to create stable system liquidity and finishing dealing with weak banks.