Monetary Policy Management: Challenges and Strategies
Deputy Governor of the State Bank of Vietnam, Dao Minh Tu. Photo: Nguoi Lao Dong Newspaper
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Navigating Complex Economic Conditions
Addressing a recent forum, Deputy Governor Dao Minh Tu highlighted the State Bank of Vietnam’s (SBV) commitment to maintaining current interest rates and stabilizing exchange rates. These factors are crucial for businesses engaged in import and export activities, along with ensuring optimal credit access and adequate capital.
The management of monetary policy and banking operations in the first three months of the year and now, approaching the end of April, has been particularly challenging. The domestic economy faces significant external influences and internal difficulties, which have intensified over time.
Sluggish Credit Growth and Economic Challenges
During the first two months of the year, credit growth remained negative, despite unchanged mechanisms, policies, and infrastructure. Demand for credit, investment, and consumption remains subdued amidst ongoing business difficulties.
Despite these challenges, businesses have experienced an uptick in orders, although prices have surged. By March and currently, some regions have reported positive credit growth, reaching approximately 1.5%.
The SBV, along with the government and other relevant ministries, is actively implementing supportive policies to stimulate investment, consumption, and credit demand.
Maintaining Interest Rate Stability
Regarding capital and liquidity, credit institutions (CIs) continue to maintain ample resources. Businesses with viable projects that meet minimum credit criteria will receive loans.
Since the beginning of the year, the SBV has proactively allocated credit limits to commercial banks. The target credit growth for the year is set at 15%, with the potential for further increases if necessary and supported by macroeconomic indicators.
Interest rates have remained low for several decades, particularly for new loans. Interest rate management requires careful consideration as it impacts exchange rate policies. Accordingly, the SBV advocates for interest rate reductions aligning with the macroeconomic context and inflationary pressures.
The SBV has emphasized that it is not considering interest rate adjustments, either increases or decreases, and will maintain current policy rates. CIs are encouraged to reduce lending rates, particularly in priority sectors.
The extension of debt relief and deferral measures for businesses has been extended to the end of the year, beyond the initial June 30th deadline, as per Circular 02 amendment. Commercial banks will also continue to offer preferential credit packages, providing businesses with access to low-cost capital.
The SBV has directed commercial banks to leverage technology to reduce costs for businesses. This is a critical initiative.
In addition, banks are promoting consumer credit to stimulate domestic demand and reduce inventory levels. Furthermore, the SBV encourages closer collaboration between banks and businesses, with Ho Chi Minh City serving as a leading example.
Balancing Exchange Rate Stability
Regarding the exchange rate, Mr. Tu acknowledged recent fluctuations and the Vietnamese Dong (VND) has experienced some depreciation compared to the beginning of the year. In 2023, the VND has depreciated by approximately 2.6%, a notable achievement considering the performance of regional currencies.
At the beginning of 2024, the SBV indicated that it would utilize foreign exchange reserves to intervene if necessary to stabilize the exchange rate. As of today, the central bank’s reference rate has decreased by 4.8% compared to 2023. Despite this, the current depreciation remains favorable relative to other markets, such as Taiwan (China) at 5.96%, Thailand, Japan, South Korea, and Switzerland, which have experienced more significant depreciation.
Given the open nature of the Vietnamese economy, exchange rate management is crucial. The SBV will continue to implement prudent measures to ensure stability.
External Factors and Their Impact
Regarding the policies of the Federal Reserve (FED) and other countries, we anticipate FED interest rate cuts, although official announcements are still pending. The US Dollar (USD) has reached its highest value in recent history. Declining investment demand, protectionist policies in major economies, and weakening global consumer demand are impacting Vietnamese exports.
Furthermore, escalating logistics costs, commodity shortages, and geopolitical tensions in the Middle East have contributed to a surge in gold prices, surpassing $2,400 per ounce. These factors have affected the exchange rate and Vietnamese import-export businesses.
Additionally, the rapid decline in VND interest rates has created an imbalance with USD rates, further contributing to exchange rate pressures. Import demand has also depleted foreign exchange reserves.
In the event of export challenges, foreign exchange inflows may decline, despite continued remittance inflows. Market sentiment can also influence exchange rate movements.
According to the Deputy Governor, exchange rate stability is a paramount concern for the economy and must be effectively managed to mitigate inflationary pressures.
Exchange Rate Management Strategies
The SBV aims to stabilize the exchange rate rather than fix it, maintaining a neutral foreign exchange position. To achieve this, the central bank will implement various measures, including: regulating money supply to achieve a balance, adjusting interest rates to align with exchange rate objectives, and determining an optimal level to meet both goals.
The SBV continues to provide foreign currency loans for priority commodities, recognizing that exports generate foreign exchange earnings. Accordingly, sectors such as coffee exports, which are currently experiencing favorable prices, will receive priority lending. The SBV is also collaborating with industry associations to implement a 30,000 billion VND package for seafood exports, timber exports, and other sectors.
The SBV emphasizes that export promotion remains a key focus in its policies.
The central bank implements various measures to control speculative foreign exchange accumulation, including managing commercial bank reserves, utilizing instruments to maximize benefits for businesses, and, as a last resort, administrative measures involving mandatory foreign exchange sales. However, the SBV stresses that it is currently only in the initial stages of preparing to sell foreign exchange.
Conclusion
In closing, the Deputy Governor appeals to businesses and the economy not to rely on speculative foreign exchange holdings to create imbalances in the foreign exchange market. The focus should be on fostering collaboration between businesses and banks to support economic growth.
