Multi-pronged approach to fortify monetary policy

What were the critical challenges in monetary and credit policy management in 2023, and how did the State Bank of Vietnam (SBV) address them?

State Bank of Vietnam Deputy Governor Dao Minh Tu

The global slowdown, rampant inflation, shrinking trade, volatile commodity prices, geopolitical strife, and tighter food security measures impacted economies worldwide. Interest rate hikes became a global trend as a counter-inflation measure, with notable increases by the Federal Reserve and the European Central Bank.

In this scenario, Vietnam’s growth engines in exports, investments, and consumption felt the strain, burdening the government and various sectors with the challenge of meeting socioeconomic goals. The SBV, therefore, had to navigate a complex landscape, balancing inflation control, exchange rate stability, and economic growth stimulation, amid subdued domestic markets in stocks, bonds, and real estate.

Can you elaborate on the specific measures implemented by the SBV to support businesses and the public?

Our strategy was multi-pronged. Firstly, we took a bold step in reducing interest rates significantly, a move counter to the global trend of rate hikes. This decision was aimed at providing direct economic relief and support to businesses. As a result, there was a notable reduction in the average deposit and lending rates for new transactions at commercial banks.

Secondly, we focused on stimulating economic growth through credit expansion. While targeting a credit growth of approximately 14-15 per cent, we adjusted these targets in line with real-time economic developments, maintaining a balance between credit growth and systemic safety.

A crucial policy intervention was the issuance of a timely directive in April last year on debt restructuring and maintaining debt groups. This policy provided immediate support to clients facing financial distress, enabling adjustments in debt repayment schedules and facilitating access to new loans. Additionally, we directed banks to streamline loan procedures and enhance specialised credit programmes.

What were the primary causes of the credit difficulties Vietnam faced in 2023?

The credit sector in 2023 was impacted by several key factors. Reduced investment and consumption led to lower credit uptake. The real estate market, which accounts for over 21 per cent of total outstanding credit, saw diminished credit absorption.

Additionally, challenges in capital markets, notably in stocks and bonds due to regulatory non-compliance issues, eroded investor confidence. This situation was compounded by increased risks in liquidity and maturity mismatch and a cautious lending approach by credit institutions due to heightened customer risk assessments, particularly among small- and medium-sized enterprises.

How does the SBV plan to address these credit challenges in 2024?

To boost credit growth and enhance capital absorption, the SBV has reformed its credit growth management mechanism. We have set a 15 per cent credit growth target for 2024 and assigned it to credit institutions at the end of 2023, alongside a framework for developing their credit plans.

The SBV will continue to revise and propose legal amendments to ease economic challenges and improve banking credit access. This includes advancing targeted credit programmes and policies, especially in productive and priority sectors. We plan to facilitate regular interactions between banks and businesses to address credit-related issues.

What is more, we will direct credit institutions to reduce operational costs and unnecessary fees to lower lending rates, supporting business and individuals. The focus will also be on ensuring timely credit supply for viable and effective ventures.

What strategies will the SBV adopt in terms of monetary policy and banking to control inflation, stabilise the monetary market, and support the public?

The global economy in 2024 is poised for slow growth with several uncertainties. High inflation continues to be a concern in many countries, and Vietnam faces increasing economic risks due to reduced global demand impacting our industrial manufacturing sector. These factors contribute to ongoing inflationary pressures and challenges in investment and consumption.

Our goal is to support economic growth targets of around 6 to 6.5 per cent, alongside maintaining macroeconomic stability and keeping inflation around the 4 to 4.5 per cent mark. A key part of our strategy is the flexible management of open market operations.

We are poised to actively support liquidity in the credit institution system and align interest rates with macroeconomic stability, inflation, and monetary policy objectives. This also includes encouraging credit institutions to reduce costs and lower lending rates to aid in the recovery and development of businesses.

In terms of the exchange rate management, we aim to align with market conditions and are prepared to intervene in the market when necessary. This will be complemented by a coordinated use of monetary policy tools to stabilise the foreign exchange market, which is vital for controlling inflation and ensuring overall macroeconomic stability.

On the credit front, our management approach will be harmonised with macroeconomic developments to support economic growth and control inflation, while ensuring the safety of credit institutions. We’re targeting a systematic credit growth of around 15 per cent for 2024, adjustable according to real-time economic conditions.

Continuing with our debt restructuring and non-performing loan resolution, we also aim to enhance the financial capacity and governance of credit institutions.

Monetary policy governance requires thorough consideration: official As the governance of the monetary policy has to concurrently guarantee multiple targets, including reducing interest rates, expanding credit, stabilising foreign exchange rates, and ensuring credit institutions’ safety, thorough consideration is needed before any steps are taken, Deputy Governor of the State Bank of Vietnam (SBV) Dao Minh Tu.

A different approach for monetary policy adjustments Data from the State Bank of Vietnam showed that after a 5.5 per cent increase in money supply in 2022, there was a 13 per cent increase last year. Le Hoai An, a banking consultant and trainer at Integrated Financial Solutions, talked to VIR’s Hong Dung about the current money supply and velocity.