Monetary policy has reflected market developments

However, to really create the footprint, policies must still be more drastic and stronger. This is the statement of Dr. Dinh Tuan Minh, an economic expert, senior researcher of the Institute of Strategy and Science Technology Policy, and founding board member of the Institute of Economic and Policy Research (VEPR).

Can you tell us the most striking point of monetary policy in 2016?

The most prominent feature of this year’s monetary policy is the exchange rate policy. This policy was in accordance with the commitment of the central bank since the beginning of the year, the exchange rate to operate under the new method, flexible, adjusted daily to be closer with the market, without maintaining the rigid exchange rate as in previous years. Thus the exchange rate does not generate sudden shocks to the market.

The other policies of the SBV have been outstanding. For example, the noteworthy point is the pilot of SBV to apply the Basel II standards to a number of banks, in order to facilitate better standards in the management of capital flows and the currency system. The pilot was started in 2014, and was supposed to have drastic action in 2016, but so far there is not any clear result in implementing, but this is a good policy of the State Bank.

2016 was the year of big changes, how has the monetary policy of Vietnam adapted, sir?

In fact, 2016 was a year of political movements such as Brexit and the United States presidential election, while the economy was without any significant shocks to be mentioned, the country’s economy is still going steadily. However, these political shocks also partially influenced monetary policy, especially through the exchange rate due to investor psychological concerns about international political turmoil which affects economic fluctuations.

But with the flexible exchange rate regime, unlike in the past, the exchange rate was inhibited by a fixed rate, now the exchange rate reflects external influences. The US Federal Reserve System (FED)’s decision to raise interest rates by 0.25% is entirely in the forecast of experts, the market was built on the "scenario" for monetary policy to promptly adapt before that, so it is less likely to affect the domestic monetary policy.

Apart from the advantages, in your opinion, what are the limitations of the monetary policy?

The biggest drawback of the whole banking system is not only monetary policy, but the handling of bad debt which caused negative impact on interest rates and capital flows. This is an issue that the State Bank has not successfully handled over the years, the banking sector still lacks mechanisms for handling the collateral assets and sales market formation etc., so that after achieving positive results from 2012, the bad debt situation is still almost "stalled".

Besides, the interest rate has not yet been as expected by experts and enterprises. However, it is understandable for the banking sector since interest rates should be in accordance with the inflation signals and market expectations. People themselves are still not really confident in keeping money in the banking system so we have a hoarding situation, turning to invest in foreign currencies, real estate or buying gold etc. Thus, the interest rates must be high to attract customers, but high interest rates in deposits is a natural parallel with high interest in lending rates. So in the short term, instead of forcing people to send money with low interest rates to lower the lending rates, there is a need to strongly reform the economy, improving bad debts, reduce inflation and increase confidence for depositors.

The US/VND exchange rate chart from late November to 15th December, 2016. Source: Eximbank.

In your opinion, are there many burdens such as the tight budget or weak bank situations in the monetary policy?

In my opinion, the burden of monetary policy does not actually come from the external effects, but from internal unresolved issues. Although the budget situation has somewhat affected the system, when the budget is limited, government bonds will compete with the banks in attracting capital flows, so that enterprises meet difficulties in accessing loans even though with high interest rates.

But the problem does lie in the system itself when bad debts have not been resolved thoroughly, the expectations to remove the ceiling interest rate have yet to be implemented, the restructuring of weak banks, the “Zero VND” banks is still not effective. These are the problems that the State Bank can solve but they postpone for a long time, creating bottlenecks in the system and there is no sign of settling up till now.

With the above listed limitations, in the upcoming 2017, how will monetary policy management be improved, sir?

The first thing is to build a "healthy" banking system, build the Basel II standards systems and universalize the whole banking system. If we do so, it would contribute greatly to solving bad debts with better results. Thus, may be after 5 years, the interest rate may actually decrease as expected, helping businesses to access capital better.

On the issue of the exchange rate, as I said, this is the most positive point and should be maintained, to assure that monetary policy will remain stable despite any economic fluctuations. In this way, also after about 5 years from now, we will come back to evaluate if necessary to liberalize the exchange rate or not, or need to have stronger policies.

But above all, I think, the State Bank needs a strong improvement in operating mode, because they are still using "administrative orders" to intervene even though monetary policy has been eased. Whether this operating method is good or bad will be reflected in the market, so that we cannot correctly identify if the State Bank should or should not do so. This is a long story that needs time to evaluate and learn from experience, but the State Bank should also consider the detail processing solutions for more effective results.

Thank you!