Strong enough boost for the economy?

A flood of support policies

On the afternoon of May 24, the State Bank of Vietnam (SBV) announced that it had issued Directive No. 02 on strengthening credit activities and implementing policies to restructure debt repayment terms and maintain debt groups to support customers facing difficulties according to the provisions of Circular 02/2023.

Accordingly, the Governor of the State Bank of Vietnam requested credit institutions to promptly issue and immediately implement internal regulations on restructuring debt repayment terms and maintaining debt groups as prescribed in Circular 02/2023.

According to this circular, credit institutions evaluate loans to organizations/individuals who are unable to repay principal/interest due to a decrease in revenue and income compared to the loan plan and extend the term by 12 months from the old due date. Credit institutions are not required to adjust the classification into a higher risk debt group. The circular is effective until June 30, 2024.

Previously, on May 23, the State Bank of Vietnam issued a statement on further reducing a series of operating interest rates, effective from May 25. This is the third time in less than 3 months that the State Bank of Vietnam has reduced operating interest rates.

In this third reduction, the SBV lowered the refinancing interest rate from 5.5% to 5%/year. The overnight interest rate in interbank electronic payments and loans to cover capital shortages in SBV's clearing payments for credit institutions decreased from 6%/year to 5.5%/year. The ceiling interest rate on deposits with terms of 1 month to less than 6 months decreased from 5.5% to 5%/year.

Previously, in mid-March and early April 2023, this agency adjusted a number of operating interest rates twice to support the economy .

The State Bank has introduced many monetary policies to support the economy. (Photo: H.Ha)

The State Bank also requires credit institutions to continue to cut costs to reduce lending interest rates and fees to support businesses and people to recover and develop production and business. Promote a credit package of VND 120,000 billion for investors and home buyers of social housing projects, worker housing, and projects to renovate and rebuild old apartments according to Resolution 33/NQ-CP dated March 11, 2023 of the Government .

On May 24, the Government submitted to the National Assembly a proposal to reduce value-added tax (VAT) by 2% for some taxable goods and services (from 10% to 8%), which is expected to be applied in the second half of 2023. The tax reduction does not apply to telecommunications, real estate, securities, insurance, and banking.

Support policies are introduced in the context of difficult production and business activities.

According to many experts, the reduction of the State Bank's operating interest rate will create conditions for the interest rate level to decrease, making the cost of capital lower. Thereby helping to improve business performance. People can consume more....

Meanwhile, the reduction in VAT, according to Finance Minister Ho Duc Phoc, aims to stimulate consumption and promote production and business to recover soon.

Despite the steady flow of good news, investors remain cautious. The stock market continues to face selling pressure. The VN-Index fell more than 4 points to 1,061.79 points in the trading session on May 24.

All banking stocks fell. Financial, insurance, securities stocks and some sectors such as retail, steel, consumer… mostly fell. Only a few real estate stocks increased in price.

Positive in the long term

According to ACB Securities (ACBS), the State Bank's interest rate reduction is only a necessary condition, not a sufficient condition, to promote Vietnam's economic growth.

ACBS believes that production and consumption are two important sectors in the economy. Currently, both sectors are facing a decline in activity. People will not have the need to borrow to spend more. Businesses also have no intention of borrowing to expand production activities.

Therefore, interest rate cuts may not have much impact without growth in production and consumption demand. The manufacturing sector is largely dependent on major trading partners such as the US, EU, Japan and South Korea.

ACBS Securities believes that the economy may have to wait for the recovery of consumer demand from those major trading partners.

In addition, as the manufacturing sector recovers, domestic consumption demand will also recover. These impacts are sufficient conditions to boost growth in 2023.

According to Mr. Huynh Minh Tuan, founder of FIDT JSC, the State Bank's lowering of operating interest rates is positive in the long term.

He said that with the decision of the State Bank, the operating interest rate and the interest rate ceiling after May 25 are almost equivalent to the initial reduction in economic support due to the impact of Covid (March 17, 2020). The operating interest rate has the highest support in nearly 15 years.

However, the operating interest rates are for market 2 (between credit institutions and the State Bank). The impact on the economy through market 1 will not be too great if this interest rate reduction is considered separately. The commercial banking system depends more on money supply and credit room than operating interest rates.

In addition, according to FIDT, when the economy is in a recession, the ability to absorb capital will be weaker. When risks increase, credit conditions are also relatively stricter.

Therefore, the policy needs to be synchronized with increasing the economy's capital absorption capacity and opening credit conditions, combined with the State Bank continuing to buy USD, increasing the supply of VND to the market 1.

So, overall, regulators are working to help the economy prepare for the early stages of recovery.

As for the ceiling interest rate for deposits with terms of 1 month to less than 6 months, it has been reduced to 5%, which will help reduce the deposit interest rate level in the near future.

FIDT believes that in terms of impact on the market and investment channels, in the long term the decisions will bring positive effects, similar to the end of 2012.

However, in the short term, it will be quite difficult to predict. Information predicting this interest rate cut has been widely spread in the market since last week, so it is difficult to create an element of surprise.

In addition, many US economic variables this week may affect market sentiment such as: negotiations on the public debt ceiling have not made much positive progress; FOMC has a meeting this week and US employment data.

For the economy, the decisions will bring capital opportunities to businesses at lower costs (expected), in the context of high interest and payment pressure on businesses. Along with that, many business sectors are still dependent on/waiting for credit capital to restore production and business.

The State Bank needs to reduce the level of interest rates for mobilization and lending; maintain stability in the foreign exchange market, and manage exchange rates in accordance with the situation.

Source