Government agencies are discussing how to launch a sufficiently large stimulus package to help the economy recover and develop after Covid-19. In the current context, is there room for this policy?
For nearly two years, the world has confronted with an unprecedented crisis, Covid-19. It is hard to comprehensively list its impacts on the economy, health care, public security, social issues and lifestyles. In Vietnam, most sectors have been adversely affected. Economic growth in 2020-2021 will be the lowest. In this context, the Government is making some adjustments and may increase the volume of public loans besides offsetting the impact on the budget caused by soaring expenditures on the fight against Covid-19 in 2020-2021, accelerating the disbursement of public investment to fuel the growth and development of business and igniting multiplier effects in production and consumption.
Room for fiscal policy
Some contend that as public debt in 2021 was about 43.6% of GDP, far below the threshold (55% of GDP), there is ample scope to expand fiscal policy to help the economy recover and thrive after the pandemic.
Public debt as a share of GDP is a criterion that has captured the attention of researchers and the media for almost a decade. Protagonists in support of the view above argue that domestic and international interest rates are low and there are ample loans available from international organizations, offering opportunities to mobilize important resources to stimulate economic growth, especially since many resources are required to support the recovery of the economy after the pandemic.
Significant foreign loans often cater to medium-term and long-term goals. Interest rates may be low, but negotiations are often protracted. The projects eligible for these loans should be strategic and come with time-consuming feasibility studies. Short-term loans are more accessible but come with high interest rates that may impose pressure on forex policies.
Domestic short-term loans are expected to be available via short-term bonds, most probably purchased by commercial banks. The Government’s debt payment obligations, already on the rise, will increase further. Increasing money supply to settle such debt will fuel inflation.
This article will not delve into the selection of projects and sectors for economic stimulus. However, whether the loans are domestic or foreign, the Government must focus on their impacts on debt payment obligations, inflation and exchange rates.
Scope for monetary policy and banking liquidity
Some argue that there is room for monetary expansion as the basis for offering more loans. Foreign reserves worth almost US$100 billion seem to support this view. However, it is important to ponder the role of foreign reserves in an economy.
In theory, foreign reserves are managed by monetary authorities with the aim of financing imbalances in international balances of payments and indirectly correcting imbalances through intervention in the forex market. This will influence the exchange rate and other goals such as sustaining confidence, especially that of foreign creditors.
Short-term tools should not be used for achieving strategic goals. Besides, if the increase in public debt comes mainly from domestic sources, such as via short-term bond issues mainly purchased by banks and denominated in dong.
It should also be noted that foreign reserves are assets held by central banks, but it is hard to analyze their ownership profiles since much information is confidential.
Some contend that inflation is currently low, so there is room for monetary expansion. Discounting and refinancing interest rates can continue falling, which is a good signal. However, since banks still have ample liquidity, discounting and refinancing interest rates are not urgently needed yet. Likewise, should ease monetary policies to serve monetary goals or support fiscal policies?
From this perspective, it is crucial to consider Vietnam’s banks in 2021 since their activities are closely tied to monetary policies and can serve as an indirect monetary instrument.
Vietnam’s banks in 2021 and interest reduction pledges
According to VNDirect, in the first six months of 2021, the total net profit of 17 listed banks rose by 55.5% year-on-year. Most listed banks see their net interest margin (NIM) increase since capital costs fall more rapidly than returns on assets (average returns on assets dropped by 43 points year-on-year, less than the 120-point reduction in capital costs). It is possible that the NIM of the 17 listed banks in the last six months of 2021 is less than that in the first half, especially since commercial banks have been asked to lower interest rates to support customers during the pandemic. Even then, assuming that VNDirect’s data is reliable, listed banks (those taking part in the interest reduction program since July 2021, except Agribank) can still attain efficiency.
According to the State Bank of Vietnam (SBV), from July 15, 2021 to September 30, 2021, 16 commercial banks, including VietinBank, Vietcombank, Agribank, BIDV, MB, Lien Viet Post, TPBank, VIB, ACB, Seabank, SHB, HDBank, MSB, VPBank, Techcombank and Sacombank (kept at 75% of the share for the loan market) lowered interest rates with a total decrease of about VND12.236 trillion, equivalent to 59.36% of what is pledged for almost VND5,500,000 billion worth of loans. According to VNDirect’s estimates, this disparity, which was a “windfall,” between how rapidly capital costs and returns on investment fall (77 percentage points), the total interest reduction should be far higher than the figure posted by 16 banks.
Even then, it should be acknowledged that Vietnam’s banks have been rather good at capitalizing on falling interest rates since July 2021, when the interest subsidy campaign started.
The estimate above is based on the VND5,500,000 billion worth of loans eligible for interest rate support. The scope for leveraging on interest rate reduction in the entire system is still significant. According to the SBV, as of August 2021, the total amount of loans offered was VND9,870,000 billion. The net profit of 17 listed banks rose by 55.5%, supporting this argument.
The Government needs to be cautious when proposing the interest rate stimulus package. Compared with the situation in 2009, the economic storm in 2021 differs significantly.
Interest rate reduction is a nice gesture on the part of banks. There is room for stimulating demand via interest rate subsidy in some sectors and some projects (which Finance Minister Ho Duc Phoc says can be VND10-20 trillion), especially since banks have yet to totally fulfill their pledges (currently the total reduction is only 59.36% of the VND20.613 trillion pledged). There are also other banks that can play a part.
Banks need to exercise social responsibility in this turbulent period. Tens or hundreds of banks have been in financial distress, but many banks continue doing reasonably well.
In 2009, when credit was disbursed swiftly, inflation rose, exchange rates became volatile and malpractices arose. There is still no comprehensive analysis of the impacts of that stimulus package.