The year 2024 has been viewed as a standout period in monetary policy management, despite Vietnam’s economy still grappling with an uneven recovery. The deep-reaching impact of external shocks and natural disasters - especially on exchange rates - have created a challenging environment. Looking ahead to 2025, with the economy remaining highly open and global uncertainties lingering, experts anticipate significant hurdles in managing monetary policy, particularly in areas like exchange rates and interest rates and in addressing the growing issue of bad debts.

According to the State Bank of Vietnam (SBV), through a series of coordinated solutions, credit growth across the economy had surged by around 12.5 per cent in 2024 as of December 13 compared to the end of 2023.

Notably, credit flowed strongly into key growth sectors. The manufacturing and processing sector saw credit growth of 10.52 per cent, from 6.25 per cent in 2023, mining 12.13 per cent, from an 11.77 per cent fall in 2023, construction 5.46 per cent, from 1.74 per cent, agriculture, forestry, and fisheries 4.92 per cent, from 2.72 per cent, and accommodation and food services 12.55 per cent, from 4.85 per cent.

Sustaining low interest rates

The SBV has consistently maintained its policy interest rates in the wake of Covid-19, with the global economy still facing complex geopolitical challenges, high global interest rates, a widening USD-VND interest rate gap, and increasing domestic inflationary pressure. This approach is designed to ensure that credit institutions can access funding at lower cost, helping to drive the economic recovery forward.

It has also directed credit institutions to cut operational costs to reduce lending rates, and required the public disclosure of average lending rates, interest rate spreads between deposits and loans, and information on various loan packages and credit products on the websites of credit institutions, enabling customers to make more informed borrowing decisions.

Data from the SBV indicates that interest rates continued to decline during the first ten months of 2024, following a reduction of approximately 2.5 per cent in 2023. The average lending rate for new and outstanding loans at domestic commercial banks now stands at 6.7-9 per cent per annum. The average short-term lending rate in VND for priority sectors is around 3.8 per cent per annum, which is lower than the maximum short-term lending rate of 4 per cent set by the SBV.

As of the end of the third quarter of 2024, average lending rates reported by listed banks had fallen by approximately 2.7 per cent from the peak observed in the first quarter of 2023 and by 1.9 per cent compared to the end of 2023. Specifically, lending rates at private banks saw a significant reduction of 3.25 per cent from the 12 per cent peak set early in 2023, resulting in lending rates now standing at their lowest levels in many years.

Managing monetary policy to control inflation and reduce lending rates to support the domestic economy amid global economic volatility is no easy feat. Analysts believe that the challenges and pressures affecting monetary policy management will persist into the future.

Firstly, the goal of continuing to cut interest rates will be difficult, as rates have already fallen significantly. Exchange rates saw multiple fluctuations last year as international USD interest rates remained elevated for longer than expected.

Secondly, while credit expansion has occurred, it has not been properly directed towards productive sectors, instead flowing into riskier areas, most notably real estate. Credit is concentrated in the supply side of the market, with loans going to developers and real estate investment companies. However, despite a downwards trend in lending rates, people are hesitant to borrow for property purchases due to ongoing market instability.

Thirdly, there is still significant pressure on the banking system to supply capital, including medium and long-term funds, as raising capital through the corporate bond and securities markets remains challenging. The pressure from bank deposits continues, with individuals seeking other attractive investment opportunities due to low deposit interest rates.

Lastly, there is the increasing burden of bad debts. As of the end of the third quarter of this year, the non-performing loan (NPL) ratio stood at 4.55 per cent of total outstanding loans; almost identical to the end of 2023 and up from 2 per cent in 2022. At the same time, the banking sector’s provision buffer has continued to shrink, with the average bad debt coverage ratio falling to its lowest point in the past five years.

Monetary policy management dilemma

Dr. Le Xuan Nghia, Member of the National Financial and Monetary Policy Advisory Council, identified a major challenge for monetary policy management in the near future. He expressed concern about the rising value of the USD, as Vietnam cannot devalue the VND in line with the USD to avoid being classified by the US as a currency manipulator. This creates a difficult situation for the central bank going forward.

According to Dr. Nghia, US President Donald Trump aimed to keep interest rates low in his first term to benefit businesses but did not want to devalue the USD. Since most countries hold their foreign reserves in USD, a stronger dollar forces them to continue using it as their reserve currency. Essentially, President Trump’s strategy was to enhance the economic power of the US.

Vietnam has now exceeded two of the three criteria used by the US to assess currency manipulation by major trading partners. These include a bilateral trade surplus with the US of $111.7 billion in the past four quarters (surpassing the $15 billion threshold) and a current account surplus of 5 per cent of GDP (above the 3 per cent threshold).

Experts predict that 2025 will present ongoing challenges, with the global economy still facing considerable uncertainties and risks. Although global inflation has eased, it remains unstable, putting additional pressure on monetary policy, especially considering the open nature of Vietnam’s economy. Prices of global commodities are expected to remain volatile due to complex geopolitical developments, increasing concerns over food security, natural disasters, and extreme weather patterns.

Domestically, Vietnam’s economy continues to grapple with significant obstacles, including inherent challenges such as issues in the real estate market and unresolved corporate bond problems. The economy’s ability to absorb credit remains weak, as many businesses are reducing operations, halting production, or closing due to financial struggles, especially after the impact of Covid-19.

Given these difficulties, international organizations agree that there is limited space for any further easing of Vietnam’s monetary policy. With both global and domestic uncertainties, the SBV acknowledges that while the successful management of monetary policy has helped stabilize inflation expectations, the risks of inflation in 2025 should not be underestimated.

To achieve the socio-economic development targets for 2025 set by the National Assembly and the government, the SBV stresses the importance of close coordination between monetary policy, fiscal policy, and other macro-economic strategies. This approach aims to ensure sustainable economic development, balance macro-economic goals, maintain the stability of the economy, and control inflation.

The SBV will continue to employ flexible monetary policy tools, closely monitoring macro-economic trends and stabilizing the money market while being prepared to support liquidity for the credit institution system. It will also adjust interest rates and exchange rates to align with macro-economic balances, inflation, and the goals of monetary policy.

Moreover, it will continue implementing credit policies in line with macro-economic developments and inflation, addressing the capital needs of the economy. It has instructed credit institutions to focus on safe, effective credit growth, directing funds towards production, business, and priority sectors. Specialized credit programs will be implemented in certain industries and sectors, following the government’s directives. Additionally, it will maintain strict control over credit to high-risk areas while ensuring that individuals and businesses can access lending.