Should not loosen monetary policy

Monetary policy need to be more careful in operation in order to avoid risk for the system. Source: Internet

Potential risks

In early 2018, one of the world's three largest credit rating agencies - Moody's, has warned the State Bank of Vietnam (SBV) that they should be cautious with loosening monetary policies because of the threat to the economy and the banking sector, especially when Vietnam has a "hot" credit growth rate. According to the latest rating of Fitch Ratings, the banking sector in Vietnam is still structurally weak, many bad debts have not been reported so the quality of real estate may be lower than the report; In addition, the system is still weak so it causes thin capital and low profit. Therefore, this agency believed that rapid credit growth may cause a risk to financial stability in the medium term.

In 2018, the SBV set a credit growth target of 16-17%, lower than 18-19% in 2017 and 2016. According to the experts, monetary policy has been properly managed, with stable foreign exchange market, controlled inflation, anchoring inflation expectations, strengthening the confidence of the economy and investors in Vietnam Dong, contributing to creating an investment environment, a favorable business climate for businesses.

Mr. Pham Thanh Ha, Monetary Policy Department of the State Bank said that the State Bank is focusing on the ultimate goals of currency stability, inflation control and supporting economic growth rationally; Credit growth orientation has been adjusted to the practical situation and coordinated to control the growth rate as well as credit quality. Therefore, in the first four months of the year, credit growth was over 5%, relatively equal to ensure the liquidity of the system is always stable, and stable interest rates.

In particular, the "plus point" of recent monetary policy has escaped the "ordinance" philosophy, moving to "guiding indicators", in order to not force the SBV to pump money out for achieving targets such as credit indicators, interest rates, contributing to economic growth. The Economist expert Phan Minh Ngoc said that with the policy of stabilizing the economy over economic growth, the SBV has reduced the pressure to implement the loosening monetary policy as before, helping to control the potential risks, and interest rates for loans are at relative levels and should be acceptable for businesses.

Be more cautious when loosening

The economy from now until the end of the year and in the future is foreseen to have more fluctuations, especially for the financial sector. Therefore, a rational operating policy will help the economy avoid shocks from the market, supporting sustainable growth.

According to the Bao Viet Securities Company (BVSC) report, in the first quarter, total payment instruments and customer deposits (M2) reached 3.23% compared to the end of 2017 which is equivalent to 264,000 billion VND. Throughout 2017, the growth rate of total means of payment for M2 is likely to be lower than that of credit growth, indicating the cautiousness of the SBV will remain in control in 2017. However, movements in the first 3 months of 2018 showed a reversal when the growth rate of M2 was higher than that of credit growth (difference of 1%). This is due to the low level of interbank rates and the strong growth of foreign exchange reserves (about $US 57 billion). Therefore, BVSC experts said that in 2018, the State Bank will still prefer loosening monetary policy to support growth but will be more cautious in the next quarters when inflationary risk is still unpredictable.

Agreeing with BVSC’s point, economic expert Phan Minh Ngoc said that everyone is aware that monetary growth is only part of overall economic growth, so the credit growth rate is set at 16 -17%, but they will be more careful, giving priority to quality of growth. This is also the direction of the head of the Government from the beginning of this year for both the banking system as well as the economy in general.

However, in the current economy, monetary policy is "shoulder to shoulder" part of the role of fiscal policy on controlling inflation. Thus, the experts suggested that the current monetary policy should not be loosened but it should take caution in order to support growth. According to Dr. Nguyen Xuan Thanh, Director of Development Department of Fullbright University, loosening monetary policy is the burden of the SBV and the banking sector. By the first quarter of 2017, it only grew by 5%, it was much lower than the target so that the space for fiscal policy is not much, and the burden placed on monetary policy is huge. Stepping into quarter 1 of 2018, it is growing better with good demand, good export, positive production. Therefore, it is important to note that growth has shifted from good to over-heating, especially in asset markets. The expert emphasized that monetary policy orientation must focus on supporting growth, not to loosening; it needs a road map for market re-establishment.

It could be seen that monetary policy has always played an important role in the development of the economy, reflecting the stability or fluctuation of the economy. Thus, a prudent policy is set out with market flexibility, which incorporates monetary policy and fiscal policy, which will help the banking system to grow stronger as well as proactive in dealing with the risks of the economy.