Reasonable interest rates - leverage to recover the economy

VCN - Amid the serious economic downturn, high interest rates are seriously affecting the dynamics of the Vietnamese economy. In other words, interest rates affect investment demand, business, and capital market and are one of several channels that directly affect the economy.
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Reasonable interest rates - leverage to recover the economy
Businesses need a lot of support to recover and develop. Photo: H. Anh

Therefore, to support economic recovery and smooth capital flow, reasonable interest rates will be an essential leverage.

Erosion of competitiveness

According to the assessment of Dr. Nguyen Tu Anh, Director of the General Department, Central Economic Commission, high interest rates are negatively affecting the competitiveness of Vietnamese enterprises. This will pose a risk to newly established businesses, and existing units will have difficulty accessing capital and investment. In the context that the economy in the first four months of the year is showing signs of serious decline, especially in Vietnam’s industrial centers, export processing and export centers, the main engines and driving force centers of Vietnam's economy are seriously affected. It can be said that high interest rates directly impact investment demand, business, and capital market, and are one of the channels that directly affect the economy.

Analyzing this issue more closely, Anh said that the current interest rate was high. The average interest rate of banks is up to 12-13%, even some units give loans with an average interest rate of more than 14.6%. Notably, interest rates started to increase from July 2022 to February 2023 and continued to stay high, eroding Vietnamese enterprises' competitiveness.

“According to the State Bank of Vietnam, the average credit balance in 2022 was VND1,135,100 billion with an average lending interest rate of 10%/year. Particularly, the interest expense of Vietnamese businesses and people has suffered at least VND1,135,091 billion, equivalent to 12% of Vietnam's GDP in 2022. If the lending interest rate decreases by 1%, the support for the economy will amount to more than VND113,000 billion, larger than the packages of the Recovery program," said Anh.

Compared with China's interest rates, it can be seen that interest rates in China have fallen sharply since July 2021, the average lending interest rate in China in December 2022 was 4.14% and in the 12/2008-12/2022 period, the average lending interest rate was only 5.62%. Notably, since being affected by Covid-19, lending interest rates in China have continuously and quickly decreased, thereby helping Chinese businesses recover strongly after the pandemic.

Thus, in terms of capital costs, Vietnamese enterprises cannot compete with Chinese enterprises; neither does technology; no economic advantages of scale; no economic advantages of industry linkages that create large industrial areas; logistics costs are not competitive. That means the chance for Vietnamese enterprises to compete with Chinese enterprises is zero. Therefore, if Vietnamese enterprises cannot compete with Chinese enterprises in the short and long term, the competitiveness of Vietnam's goods production will face difficulties.

To support Vietnamese businesses to overcome these troubles, Dr. Nguyen Tu Anh recommended that it is necessary to have drastic policies between the banking and finance industries so that in the short to medium term, the Vietnamese interest rate must be lowered to improve the competitiveness of Vietnamese enterprises.

Balancing financial risks with economic recovery support

According to the Vice Rector of the University of Economics (Hanoi National University), Assoc. Prof. Dr. Nguyen Anh Thu, interest rate is a big issue, having a profound and broad impact on the development of Vietnam's economy, as well as on policy making. According to her, high interest rates will greatly affect production, business activities, and business development indicators. Notably, high interest rates not only affect the competitiveness of existing businesses but also affects the need to start and establish a business because they will make start-up costs increase, making people who want to start a business falter.

According to Thu, reasonable interest rates are considered an important lever to promote the production and circulation of goods, promote economic development and vice versa. Interest rates are a huge issue, having a profound impact on the development of Vietnam's economy and policy making.

Since 2021, along with the recovery of major economies after the Covid-19 pandemic, inflation has remained high in many countries. “However, in our country, inflation was controlled at a low level. The CPI growth rate in 2022 was 3.15%, which reached the target set by the National Assembly of less than 4%. These results are possible because Vietnam has applied and adjusted policies flexibly and appropriately to proactively deal with inflation risks as well as internal and external risk factors”, said Thu.

Experts believed that the reduction of interest rates would promote production, competitiveness, and the development speed of the economy. However, manipulating interest rates is considered a tool of monetary policy. Monetary policy should maintain a state of adaptation to the current state of the economy, balance financial risks with support for economic recovery, and open the flow of capital. The State Bank of Vietnam always adjusts operating interest rates flexibly to ensure monetary policy objectives while harmonizing the interests of parties such as depositors, credit institutions, and borrowers.

Dr. Can Van Luc, BIDV's chief economist, said that Vietnam's interest rates in 2023 were still high because the money supply was low and many credit institutions were weak in 2022. It is forecast that 2023 will be a year of slower growth than previous years due to global political turmoil, trade and financial risks, and global economy instability. In this context, Vietnam's inflation will increase higher than in 2022. However, if the policy can be reconciled, Vietnam still has room to reduce interest rates in the second quarter of 2023 and its economy will grow well.

"The pressure of inflation, exchange rate, and interest rates in the world is decreasing and much softer than last year. Bank liquidity this year is better than the fourth quarter of 2022. By the end of the first four months of the year, credit increased by 3.05%, capital mobilization increased by 1.5%, which means people's money is still pouring into banks. Not to mention, if the disbursement of public investment increases, the outstanding debt of enterprises decreases, the bottlenecks are cleared, and the business environment is improved, Vietnam’s economy will grow well," said Luc.

Reasonable interest rates - leverage to recover the economy
Dr. Nguyen Quoc Viet

Vietnam still has room to reduce interest rates

Deputy Director of the Institute for Economic and Policy Research (VEPR) - Dr. Nguyen Quoc Viet said that currently, Vietnam has room to reduce interest rates for businesses, helping to recover the economy.

VEPR's report on "the impact of the high interest rate environment on macroeconomic stability and growth recovery in 2023" showed a picture of many paradoxes between banks and businesses, as well as the impact of high interest rates on economic growth recovery. Could you elaborate on these effects?

According to the VEPR's report, it is alarming that the competitiveness of Vietnamese enterprises is declining sharply. Suppose enterprises on the stock exchange represent the best enterprises in the economy (except for enterprises with 100% state capital and enterprises with foreign investment capital that are not listed). In that case, the health of the Vietnamese enterprise system in 2022 has weakened a lot.

The negative factors for the Vietnamese economy such as the quiet real estate market and the corporate bond market have started since the end of the first quarter of 2022. But these things have not affected businesses much when the economy in the second and third quarters of 2022 both grew significantly. However, in the fourth quarter of 2022, the sharp decline of export activities, stemming from weak demand of Vietnam's main partner countries, seriously affected the business results of enterprises. Notably, in the face of adverse external conditions, enterprises hardly received any support, even lending interest rates increased, further weakening their competitiveness.

Data in the first three months of 2023 showed that the growth rate of credit and capital mobilization decreased sharply. Credit growth was low due to weak demand and high interest rates. It is worth noting that the capital mobilization speed of economic institutions as of March 28 decreased to -3.4%. The increase in capital mobilization was mainly due to the sharp increase in people's deposits, but it was not enough to compensate for the decrease in deposits from economic institutions. The growth rate of capital mobilization in the banking industry by the end of March was only 5.18%, much lower than the average rate of 13-14% in the past 10 years, even during the Covid-19 pandemic period (1/2020 to 10/2021), the average capital mobilization rate still reached about 12.7%.

The decrease in capital mobilization in the economic organization sector while the slow increase in credit has reflected the difficult liquidity situation of enterprises, because good businesses with excess liquidity had to withdraw their deposits to meet their own liquidity needs. Simultaneously, a part of the decrease in deposits of economic organizations is because FDI enterprises, enterprises with export activities tend to transfer idle money abroad to enjoy high USD interest rates, while USD interest rates in Vietnam still maintain the 0% policy. Only in the fourth quarter of 2022, foreign credit institutions withdrew US$368 million from Vietnam (according to the State Bank).

Obviously, the high interest rate environment is a big risk factor for the competitiveness of Vietnamese enterprises. Meanwhile, in the period 2011-2020, Vietnam is mainly a current account surplus, ie a capital exporter. For example, in 2021 and 2022, due to the cost of importing drugs and equipment to prevent the Covid-19 pandemic and skyrocketing transportation costs, the current account balance became negative. However, in the long-term, Vietnam still has a current account surplus and is a capital exporter. Thus, Vietnam has room to reduce interest rates (when in the position of a capital exporter).

So what policy recommendations do you have to promote economic recovery, restore production and business of enterprises quickly and strongly?

In the short term, to promote economic development, amid the economic difficulties from the end of 2022 until the first quarter of 2023, Governments can increase support for the economy, expanding spending to prioritize growth. In which, it is necessary to focus on key tasks such as balancing the goal of "maintaining macroeconomic stability" but at the same time finding policy solutions to promote economic recovery, and restore production and business quickly and strongly. Policies need to be applied and coordinated rhythmically with a unified and smooth coordination, based on market solutions instead of administrative orders. Fiscal policy needs to play a key role, solutions related to extension, postponement, fee reduction, and tax need to help people and businesses regain confidence and excitement in the market. Monetary policy also needs to maintain an accommodative state, and at the same time, it is necessary to have policies to promote export growth, even deploying "order diplomacy" like vaccine diplomacy that was implemented before.

In particular, it is necessary to improve the business investment environment continuously. Accordingly, the business environment reform needs to drastically cut costs, including the cost of law enforcement and the costs of enterprises when conducting their business. Only in this way can businesses improve their competitiveness and adapt to the fluctuations and instability of the domestic and foreign economies.

Additionally, we must have security strategies, for example, energy security or issues related to supply chains or food security. One essential thing that we need to pay attention to is improving enterprises' competitiveness and connecting businesses. It helps us to increase the added value in Vietnam's export products and helps businesses grow, accompanying foreign-invested enterprises in Vietnam.

In the long term, it is necessary to have forecasts that adequately assess the domestic and global economic situation to support the Government's policies. Promote social and energy security, improve the competitiveness of enterprises, and connect businesses, thereby enhancing the added value of exports, enhancing innovation capacity and connecting scientists to support economic development.

It is time to have drastic policies to coordinate between the banking industry, the financial industry, and the capital market to reduce the interest rate level in the short and medium term to improve the competitiveness of Vietnamese enterprises. Then achieve the goal of maintaining the economic growth rate of 6-7%, to become a high-middle-income country in the coming years.

Thank you, Sir!

By Tuan Phong/ Ha Thanh

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