A steady hand to guide economy

Nguyen Van Binh

What are the State Bank’s monetary policy management priorities in the coming months?

With the aim of curbing inflation, the monetary policy will be managed not only closely but also flexibly to meet the needs of the Vietnamese economy. The State Bank’s priority target until the end of the year and also for the coming years is to stabilise the value of the Vietnam dong. In addition, the State Bank is targeting the scaling back of the average lending rate for production and commerce sectors to 17-19 per cent, per year. The bank also wants to closely control the gold market and fight the overly high growth in foreign credit.

The State Bank’s general solution is to ensure the credit growth rate of the whole banking system this year does not exceed 20 per cent.

The VND/USD exchange rate is skewed and this is leading to concerns over exchange rate stability in the next few months. Could you please analyse this trend?

Three things must be emphasised. The first is the economy is not lacking foreign currencies. Together with the forex market and Vietnam dong stabilisation policy, we have the conditions to stabilise the exchange rate.

Secondly, foreign exchange reserves have increased considerably. This means we have a plentiful source of foreign currency which is being used carefully and efficiently. The State Bank is fully capable of intervening in the market when necessary. 

Third, we are strictly implementing monetary policy with the priority being to stabilise the exchange rate. As a result, we are always able to create an attractive interest rate for the local currency.

After the adjustment of the VND/USD exchange rate in February, it can be said that the dong is nearly equal to the dollar in terms of purchasing power.

Since February, after changes in monetary market, we can see that the dong has appreciated slightly, in terms of the real exchange rate in market transactions.

Thus, the main focus of monetary policy in the next five months and in the years ahead is to stabilise but not fix the exchange rate, which means we must adjust the dong to its real value.

Market demand and supply is also a factor to consider when adjusting the rate. However, we are still targeting predictability of policy and not making the sort of overly large adjustments which could have a sudden impact on market psychology.

What is the impact of forex fluctuations on Vietnam’s balance of payments?

According to the State Bank and relevant ministries and bodies, Vietnam’s payment surplus will hit $2.5-3 billion this year.

The main reason is, despite high imports, other capital inflows such as overseas development assistance and remittances are expected to remain high and this will lead to a higher absolute payment surplus this year.

For remittances in particular, it has been observed that there was an increase in banks’ remittances in the last seven months. Although remittances did not surge, 80 per cent of  this year’s total remittances have already poured into banks thanks to the exchange rate stabilisation policy.

Moreover, despite the trade deficit, the balance of capital surplus remains high and that helps to create surplus in the overall balance of payment.

All of the facts above will create a real surplus and not just a book-based one. It is even possible that the surplus will be higher than $2.5-3 billion as, besides the official figures I have mentioned, residents hold huge reserves of foreign currencies which have not entered the banking system. From April to August alone, roughly $2-2.5 billion which was not calculated in the official statistics has flowed back into the banking system.

Given this situation, I believe Vietnam’s forex market will remain stable until the year’s end. Other factors such as speculation, inflated prices or people’s attitudes will create slight fluctuations. I believe that people will place more trust in the State Bank and government’s exchange rate stabilisation policy.

But isn’t foreign currency credit growth still very high?

What you say is right. Credit growth for foreign currencies has been running at over 30 per cent since the beginning of the year.

According to State Bank analysis, liquidity is still good on a national level. There is no possibility of a fall in liquidity as credit institutions have abundant foreign mobilisation sources. There is a surplus in overall mobilisation capital held by credit institutions against the total outstanding foreign currency loans of $3-5 billion. As a result, the liquidity capacity of the whole system is not a serious problem. However, when foreign currency credit growth is too high and we do not have a proactive solution, instability is likely. If foreign mobilisation capital left the country we would face liquidity loss or liquidity problems.

What we need is to take precautions and have proactive solutions to ensure the safety of the whole banking system. According to the State Bank, with the current policies as well as others to be implemented in the near future which are aimed at ensuring macroeconomic stability and stabilising the banking system, there is no possibility that credit institutions will withdraw capital.

In the long run, it will be necessary to have an anti-dollarisation programme directed at changing from a lending-borrowing relationship to a buying-selling relationship for foreign currencies. However, we cannot expect to complete this programme in a short time.

What is your long-term goal as State Bank governor?

The first goal is to change the fundamental operation of monetary policy to make it more suitable for the development of a market economy. This involves ensuring the management function of the government and the active role of the State Bank, as well as enhancing the accuracy  of monetary forecasts and boosting analysis ability to form proactive policies.

The second aim is to continue to innovate and improve the efficiency and effectiveness of the banking inspection and supervision agencies so that they really accompany local banks.

The third goal is to consolidate and reorganise Vietnam’s credit institution system, ensuring the healthy operation of credit institutions in line with international practices. For example, given the small scale  of the Vietnamese economy, 80 credit institutions are too many, meanwhile we are still short of banking services.

The fourth aim is to resist dollarisation and the expansion of gold in the economy.

The fifth target is the speeding up of non-cash payments to prevent prevalance of an unofficial market.

The sixth goal is to improve technology in the operational activities of the State Bank and to create fundamental innovation in the management activities of credit institutions.