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Thursday, June 13, 2024

Navigating monetary policy amid economic turmoil

By Van Phong

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Exercising prudence in navigating monetary policy has become more critical than ever as recession risks, escalating inflation, slow global trade growth and a banking crisis in the U.S. are biting into the global economy.

Inflation risk looms large

The macroeconomic outlook in 2022 and early 2023 has confounded economists’ predictions, said Pham Thanh Ha, deputy governor of the State Bank of Vietnam (SBV), at an annual banking forum titled “Monetary policy in turbulent times” held by the Saigon Times Group and the State Bank of Vietnam on May 10.

The global economy shifted from a recession caused by the Covid-19 pandemic to record-high inflation, with inflation running over 8% in the U.S., 10% in Europe and double digits in 80 other countries in 2022.

In response to the rapidly increasing prices, the Federal Reserve raised its benchmark federal funds rate to 5% in just 14 months, by far the quickest of any year. The decisions strengthened the U.S. dollar and hit a 20-year high, impacting the international currency market and prompting emerging and developing countries to raise interest rates to keep their currencies stable, control inflation and maintain macroeconomic stability.

“As inflation rises, tightening monetary policy is unavoidable,” Ha noted.

Efforts to prop up the economy

At the event, Duong Thi Thanh Binh, deputy director of the Monetary Policy Department under the SBV, said the global economy experienced slow growth in the first few months of 2023. Though it has escaped recession, risks remained, forcing central banks to hike key interest rates further to curb inflation.

Vietnam’s central bank took swift and adaptable measures in response to the government’s directives. To manage inflation, stimulate economic growth and preserve the stability of the country’s currency amidst forex market volatility, the SBV lowered key interest rates twice in March and April, with reductions ranging from 0.3 to 1 percentage point. It also urged banks to decrease deposit rates to support businesses and individuals, in line with National Assembly resolutions 43 and 11.

Bui Thanh Trung, deputy general director in charge of currency trading and investment at Orient Commercial Bank (OCB), said banks and enterprises were in the same boat, meaning one could not succeed while the other was in trouble. OCB has slashed its operating costs and developed policies to launch personal and business loan packages suitable for small- and medium-sized enterprises and individuals.

Challenges ahead

According to the SBV’s deputy governor, many economies might have slid into recession during the first months of 2023 due to escalating inflation and a plunge in global trade. The situation was even worse due to banking crises in the U.S. and Europe, placing greater challenges on navigating the monetary policy worldwide.

Given the complex and uncertain conditions of the global economy, it is increasingly challenging for Vietnam—a small economy with significant economic openness and internal difficulties—to effectively implement monetary policies that regulate currency exchange rates, interest rates, credit growth and consumer prices while ensuring economic recovery and safety for the entire banking system, as well as addressing the various difficulties encountered by businesses.

Binh said even though the Federal Reserve has paused its interest rate hikes, easing strains caused by the uptrend of interest rates as a result of dollar appreciation in Vietnam, interest rates stay high and inflation risks remain.

Despite the Federal Reserve’s decision to halt its interest rate hikes, which helped Vietnam ease the pressure from the uptrend of interest rates due to the dollar appreciation, interest rates remain elevated and the risk of inflation persists, Binh noted.

The recent concerns plaguing banks are the Fed’s moves, their impacts on Vietnamese monetary policy and economy and a deterioration in creditworthiness.

Le Thanh Tung, board member of Vietnam Joint Stock Commercial Bank for Industry and Trade, said the slow credit growth in early 2023 indicated weak capital absorption in the economy, with businesses shrinking production capacity and declines in people’s income, all of which directly affected banks’ health. It cannot be good if businesses are fraught with difficulties, as bank performance is considered a predictor of an economy.

“The first-quarter financial statements released by 27 public banks showed that profit inched down 4.4% over the same period last year. Since early 2022, banks have grappled with various risks, which have posed significant challenges to their operations, including liquidity risks, interest rate risks and reputational risks associated with corporate bonds and life insurance. In 2023, the banking sector faced credit risk. As enterprises struggle in times of economic hardship, banks have to increase their provisions for bad debts and withdraw accrued interest. Furthermore, the current economic climate has amplified other risks for the banking sector, such as security risks that come with transaction rooms, internal fraud and cyber-attacks,” he said.

He said he had a high opinion of the Government’s directions in tackling difficulties associated with the real estate sector, corporate bonds, public investment disbursements, banking stabilization and money supply to the economy.

The issuance of Circular 02/2023 helps both businesses and banks overcome hardships as it enables debt rescheduling and retention of debt categories to support corporate customers in difficulty and individual clients having a hard time paying off their consumer loans.

However, the SBV is treading a tightrope between curbing inflation and helping businesses out of the woods. If (the Government) bails out businesses at the expense of the banking sector’s health, the stumbling block will come back to them when banks are in trouble, warned Nguyen Quoc Hung, general secretary of the Vietnam Banks Association.

According to him, Circular 02/2023 was good news for both banks and enterprises, but if not careful, the banking sector would be entrapped in the country’s economic predicament.

Orienting to a loose, prudent, growth-supporting monetary policy

Can Van Luc, chief economist at the Bank for Investment and Development of Vietnam, held fiscal and monetary policy necessary in 2023-24 to improve the investment, business and administrative environment. The monetary policy should serve various purposes, focusing on monetary and financial stability and switching from a “tight, prudent” monetary policy to a “loose, prudent, growth-supporting” one.

Besides, interest rates should drop further, bank loans be easier to access, a policy on debt restructuring and liquidity support be developed and the restructuring of weak banks be promoted in line with Government Decision 689/QD-TTg issued on June 8, 2022.

Luc stressed the importance of fiscal policy, recommending policies that delay and reduce taxes and fees as prescribed in Resolution 12/2023, to be enforced, as well as promoting public investment in projects under the 2022-23 socio-economic recovery and development program.

“There is still room for fiscal stimulus,” said Luc.

Ha Thi Kim Nga, senior economist and representative of the International Monetary Fund in Vietnam, suggested policies be developed prudently and not trade rising inflation off for economic growth.

According to her, the central bank should rely on key interest rates to control inflation under the current circumstances to avoid placing more pressure on foreign exchange rates. In addition, it should ensure safety for major financial markets and the nation’s financial system when tackling hurdles in the real estate and corporate bond markets.

“Fiscal policies should be flexible and work toward specific goals. Vietnam also needs to strengthen its resolve to reform its structure, increase productivity, and aim for sustainable and inclusive growth. Besides, it also needs to tighten regulations on bankruptcy and insolvency,” Nga said.

Her recommendations came amid the Federal Reserve expected to halt its federal funds rate increases. The U.S. monetary tightening policy is seen to have a larger and more insidious impact on the Asian region, including Vietnam.

Though headline inflation has been controlled thanks to lower preliminarily processed product prices and delivery costs, core inflation may remain high for longer than expected and becomes the main cause of inflation before dropping to below 4%, Nga warned.

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