In addition to the dong deposit rates at about 11.2 percent per annum, close to the consensus level, in these days, many banks have started raising gold and foreign currency deposit rates again. At the same time, banks continue to step up promotion activities to mobilise more money to meet the requirements of Circular No.13/2010/TT-NHNN, which takes effect on October 1.

Inflation is expected to be at low level

Ministry of Planning and Investment confirmed that the macro-economic targets of Vietnam, such as GDP at 6.7 percent and inflation at 7-7.1 percent, are achievable. Next year’s targets have also been brought out in the government’s meeting in August 2010, according to that, GDP and inflation are expected to reach 7-7.5 percent and seven percent, respectively.

Le Xuan Nghia, vice president of the National Financial Supervisory Commission said the budget deficit has seen positive changes. It was initially expected to be 6.2 percent, and later adjusted to six percent, but in fact, the current budget deficit of Vietnam is just at 5.4 to 5.5 percent. This is so far a considerable achievement in controlling the budget deficit. In addition, the trade deficit also tends to go down. Trade deficit to late August 2010 was at about 13.8 percent, lower than the expected level of 20 percent. Thus, the macro-economic indicators, in general, have made progress, although there are still risks in the market.

The market risks derive from the slowdown recoveries of the US’ and the EU’s economies, which have affected the export markets of Vietnamese businesses. The high level of dong lending rates is also an obstacle for firms’ developments. Firms are having difficulties in accessing medium and long-term bank loans, especially under the new regulations of the State Bank of Vietnam (SBV) in Circular 13, businesses, especially real estate businesses, will face more difficulties in accessing bank credit.

According to Nghia, although the ratios to limit the credit risks given in Circular 13 are necessary, in the current market situation, they are not yet suitable and they surely would restrain the credit growth. Meanwhile, the investment growth rate of the private sector this year is likely to be much lower than that of the previous year. Specifically, to June 2010, investment growth of this sector was only nine percent, compared to 54 percent of the same period of 2009. In addition, inventory of goods to late August also increased by 38 percent compared to the same period of last year. However, prices of foods tend to increase, since prices of imported products have increased after the exchange rate adjustment.

In the fourth quarter of 2010, inflation may be higher, due to seasonal factors. However, Nghia said, with the slow recovery of the global economy in 2010, plus the predicted difficulties after that, as well as the untied “knots” in Vietnam’s economic growth, prices of essential goods such as foods and petrol, etc. are unlikely to change significantly. Therefore, average inflation rate of October, November and December would just be around 0.5 percent per month. Therefore, it can be said that the inflation control was done quite well; in addition, this year’s cumulative consumer price index (CPI) is expected to be less than eight percent.

Interest rates become more and more competitive

Although the inflation is expected to be low in 2010, those who have idle cash are still expecting for higher deposit rates, in the context when dollar/dong exchange rate has recently been increased, and gold price has hit a new high record ever.
Regarding interbank transactions in dong, in the last week, interest rates at all terms increased. In particular, interest rate for six-month term rose by 1.64 percent, from 11.66 percent to 13.3 percent per annum. Increases of other terms ranged from 0.2 percent to 0.58 percent per annum. Average overnight interest rates went up by 0.39 percent per annum compared to the previous week.

According to financial experts, interest rate often depends on inflation expectations. The government expects inflation to be at about 7.5 to eight percent this year, but people expect this to be higher. In fact, inflation this year may be controlled at eight percent; however, the actual deposit rates (including bonus and promotion) are ranging 12 to 13 percent per annum.

In addition, it is said that the reason for the gradual increase of dong, foreign currency and gold deposit rates are due to the pressure from the Article 18 of Circular 13. Under this article, banks are allowed to use maximum of 80 percent of the mobilised funds for lending. Especially, in the recent days, the market continues waiting for news on adjusting this circular. Banks expect to include the call deposits of economic organisations into the mobilised funds used for granting credit.

Meanwhile, although the policy to cut deposit rate to 10 percent and lending rate to 12 percent per annum of the government has been set for long time, it has not been much completed. Notably, the pressure to increase interest rates has recently been higher and this becomes a big concern. Therefore, according to Nghia, to carry out the interest rate cut policy and stimulate credit growth, the money supply for the economy must firstly be increased. Moreover, a new plan to manage the money supply should be calculated, in order to ensure the economy, including the banking sector and the businesses, is fully liquidated.

Therefore, according to experts, the provision that requires banks not to mobilise interbank capital at higher than 20 percent of their total deposits raised for lending should be removed. At the same time, SBV should consider remove or amend Article 18 in Circular 13. On the other hand, the interest rate of government bonds should be reduced. This is because it is currently at relatively high level, whereas discount interest rate of SBV is low. Therefore, banks having available capital would prefer to purchase government bonds at high interest rate and then sell to SBV for lower discount interest rate to make profit on the high-level currency market, leading the capital flow into the market and businesses to become more and more limited. –