Macro-economic stability is often assessed through the lens of the Consumer Price Index (CPI). Inflation climbing above 5 per cent while GDP maintains growth of 7-8 per cent would be far more beneficial than rigidly aiming for a CPI of 4-4.5 per cent while GDP growth hovers around 5-6 per cent.

Destination of cash flow in Q1

Regarding credit supply,  credit growth in the first quarter of 2024 did not dip into negative territory for the entire quarter, as was experienced in both 2013 and 2014.

Credit growth in 2023 experienced unusual trends, with a notable 4.56 per cent rise observed in the closing 20 days of the year. I am apprehensive that if the data isn’t accurate, implementing solutions won’t yield the desired results. Hence, credit growth in the first quarter of 2024 reached only 0.26 per cent, with two months in the negative: January at -0.68 per cent and February at -0.6 per cent. March showed a 0.98 per cent increase. Most of the decline could be attributed to commercial banks employing money creation techniques to inflate the denominator and total outstanding debt, to create ample space for debt growth in the year to follow. I therefore propose that the SBV refrain from utilizing credit limit tools. Of course, following various directives from the Prime Minister, there have been changes since 2024, and the SBV has set a 15 per cent credit limit from the beginning of the year.

M2 money supply witnessed growth of 6.56 per cent in 2022. At that time, the economy consistently faced money shortfalls and liquidity issues, creating challenges for both businesses and individuals. Under the World Bank’s formula, M2 should increase at least in line with GDP growth plus inflation.

Consequently, in 2022, M2 growth should have ideally exceeded 9 per cent and 12.46 per cent in 2023. Using the alternative calculation method, where credit growth equals credit expansion plus the increase in net foreign exchange assets, credit growth reached 13.76 per cent. This indicates negative growth in net foreign exchange assets of approximately -1 per cent, with more money flowing out of the country.

I advocate for a thorough examination of why deposit interest rates are declining so rapidly. Despite the SBV reducing operational interest rates four times, lending rates have decreased at a sluggish pace. This is primarily because money supply isn’t effectively circulating in the economy, and Market 1 and Market 2 lack integration. Without the SBV injecting money into the economy and with funds remaining tied up at the central bank, cheap money isn’t viable. Hence, achieving rapid reductions in lending interest rates may prove challenging.

Overall non-performing loans (NPLs) held by Vietnamese financial institutions, as reported by the SBV, currently stand at over 6 per cent, including debts transferred to the Vietnam Asset Management Company(VAMC), foreign currency debts, and additional provisions made under Circular No. 02 to extend repayment terms. Consequently, collective NPLs of banking entities are estimated to be at least 7.3 per cent. This significant figure is a fundamental factor preventing a reduction in lending interest rates, given the substantial risk component embedded within borrowing costs.

Vietnam’s approach and strategies for managing NPLs continue to adhere to the traditional model of “contain, prolong, and eliminate”. Previously, containment was followed by erosion through inflation, and the establishment of provisions. Now, policies continue to contain, extend the provisioning period, and transfer risks, perpetuating a lingering sense of uncertainty about the future.

New deposit gateways

Regarding deposits, the interest rates offered by banks have reached their lowest levels in recent years, which could be advantageous for the economy if lending rates also decrease accordingly. As of December 31, 2023, total deposits in the banking system stood at VND13.5 quadrillion ($530 billion), marking an increase of approximately 13 per cent since the end of 2022. The distribution of deposits between institutions and individuals is evenly split at 50-50.

However, the consistent and historically-low decline in deposit rates raises concerns. Interest rates for one-month deposits hover around 1.7-2 per cent, while for 12-month deposits they range from 4.6 per cent to over 5 per cent. Consequently, total deposits as of the end of March had decreased to VND13.4 quadrillion ($526 billion), a 0.76 per cent fall compared to the beginning of the year.

This decline can be attributed to a shift towards alternative investment channels like gold, real estate, and securities. Gold has again emerged as the preferred choice, with a 23 per cent price increase in the first quarter alone, resulting in a 23 per cent profit for early investors. On average, Vietnam consumes 55 tons of gold annually, with domestic supply ranging from 3 to 4 tons. This prompts imports of over 50 tons. Failure by regulatory authorities, such as the SBV, to permit imports may lead to smuggling, triggering an outflow of foreign currency and contributing to the upwards pressure on exchange rates.

Money flowing into gold has surged due to its soaring prices. Domestic gold companies, such as PNJ and SJC, have reported substantial sales, with PNJ surpassing VND30 trillion ($1.17 billion) in sales and generating profits exceeding VND1 trillion ($39.3 million), while SJC recorded revenues exceeding VND30 trillion ($1.17 billion).

Additionally, there has been a surge in funds directed towards both the stock market and real estate. According to FiinGroup analysis, the proportion of funds returning to the real estate sector has risen to 21.5 per cent, outperforming investments in banks (17.8 per cent) and securities (15.5 per cent). Investment in the stock market has seen a significant increase, with domestic funds offsetting the net selling of foreign investors. The number of newly-opened accounts has risen, with an average trading volume of VND27 trillion ($1 billion) per session.

The real estate market is experiencing a notable revival in investment, in the context of annual remittances totaling $14 billion and the Land Law now allowing overseas Vietnamese to purchase and hold real estate. Numerous real estate companies have actively repurchased bonds worth VND10.468 trillion ($411 million), constituting 47.9 per cent of total corporate bond repurchases. FDI to real estate continues to rise, particularly in industrial parks. Total newly-registered capital year-to-date stands at $6.17 billion, of which real estate comprises $1.58 billion, ranking it second among sectors and representing 25.6 per cent of total registered capital, or more than double the figure in the same period last year.

For there to be a recovery in bank deposits from now to year’s end, interest rates will have to rise. The key question is whether money is truly inexpensive at this time. In my view, money in Vietnam remains relatively costly. When we factor in the real interest rate after accounting for inflation, it still stands high, at around 4-5 per cent. Only well-performing businesses can access low-interest loans, typically ranging from 5-6 per cent for short-term funding. However, the norm tends to be higher, with short-term loans carrying rates of 7-8 per cent and medium to long-term loans even higher at 9-10 per cent. The cost of borrowing remains excessively high, making it challenging for Vietnamese businesses to compete when borrowing costs comprise a significant portion of their product expenses.

In evaluating the CPI, interest rates, and currency exchange rates to year’s end, he suggests avoiding complacency regarding inflation. He anticipates a slight uptick in inflation due to rising exchange rates, input expenses, overall costs, and wage adjustments, which all contribute to the narrative of price increases and maintain a psychological impact that bolsters the CPI. These factors are likely to prompt an increase in interest rates.

We often seem to assess macro-economic stability through the lens of inflation. Inflation climbing above 5 per cent while GDP maintains growth of 7-8 per cent would be far more beneficial than rigidly aiming for a CPI of 4-4.5 per cent while GDP growth hovers around 5-6 per cent. In the period from 1991 to 1995, inflation averaged around 6-7 per cent alongside average growth of 8.02 per cent.

Lending rates are expected to experience a marginal increase, while deposit rates will rise by 0.5-0.8 per cent. The currency exchange rate is forecast to gradually appreciate, with an expected increase of around 3 per cent. Access to funds by small and medium-sized enterprises (SMEs) continues to pose numerous challenges, as Vietnamese commercial banks require collateral, an issue that remains unresolved.

Creating breakthroughs

I  threfore suggest to adjust the inflation target of 4.5 per cent if necessary, potentially to above 5 per cent; employ more robust fiscal measures to stimulate economic demand; and utilize the unspent VND20 trillion ($786 million) from the VND40 trillion ($1.57 billion) interest support package to establish a National Credit Guarantee Fund for SMEs.

We need a paradigm shift in policy formulation. If we are providing guarantees for SMEs, it should be through unsecured loans based on credit ratings, leveraging the role of business associations. Drawing from the experiences of South Korea and Taiwan (China), we need to develop this policy, consolidating local guarantee funds into a national system and amending the mechanism outlined in Decree No. 34. If our policy approach remains overly cautious, we will never achieve breakthroughs.