Vietnam cuts lending interest rate to spur economic growth

By VnExpress   July 10, 2017 | 11:38 am GMT+7
Vietnam cuts lending interest rate to spur economic growth
A woman rides a bicycle past the building of the State Bank of Vietnam in Hanoi. Photo by Reuters

Cheaper loans and more oil are the government's answers to catching up with its ambitious growth target for this year.

The State Bank of Vietnam reduced its lending interest rate by 0.25 percent to 6.25 percent last Friday for the first time in three years, but at the same time cut deposit rates to 4.25 percent from 4.5 percent. The changes came into effect on Monday.

The central lender said the move aims to boost economic growth.

“Vietnamese companies still rely heavily on bank loans. We just need to be mindful about how the loans will be used to avoid increasing bad debt.” Do Ngoc Quynh, head of treasury at the Bank for Investment & Development of Vietnam in Hanoi, was quoted by Bloomberg as saying in its Monday report.

Data from the government’s General Statistics Office (GSO) shows that nearly 38,000 companies halted operations in the first half of this year, up 21.8 percent from a year ago.

Vietnam's economy is one of the world's fastest growing, but growth is still below the government’s ambitious target of 6.7 percent for this year. Annual inflation eased to 2.54 percent in June, the slowest pace in almost a year, according to Bloomberg.

The decision to lower interest rates came one day after the International Monetary Fund (IMF) said the central bank should remain on hold, stressing the need to contain rapid credit growth, and noting that “risks remain from the slow pace of banking sector reform”.

The country has been working to improve its banking system over the past few years.

In 2013, it set up the Vietnam Asset Management Company to buy bad debt from banks, and non-performing loans have dropped from 17 percent at that time to 2.6 percent as of March this year. The government is aiming to keep it below 3 percent, Bloomberg said.

The central bank’s credit growth target for this year is 18 percent. The banking system had about VND345 trillion ($15.2 billion) of unresolved bad debt as of late last year, according to the central bank.

In the first half, credit growth reached 7.5 percent, the highest in six years, according to the General Statistics Office.

The economy in this period grew 5.7 percent, with the first quarter growing 5.1 percent, the slowest pace in three years, and the second quarter hitting 6.1 percent, the central bank said.

In early June, Vietnam’s government put forward fresh plans to pursue economic growth this year by tapping more oil and gas, playing down warnings from lawmakers.

Officials from the Ministry of Industry and Trade said at a cabinet meeting they would increase the amount of crude oil exploited this year by 8 percent to 13.28 million tons, and gas by 10.4 percent to 10.6 billion cubic meters. This will help add around 0.25 percent to economic growth

A week later, lawmakers continued to question whether the economic expansion target for this year was too ambitious, and raised concerns over the plan to tap on oil and gas reserves to meet the goal.

In response, Minister of Planning and Investor Nguyen Chi Dung told legislators that increasing crude oil output was just a temporary solution, and that the government had pledged not to pursue growth at all costs.

In April, the Asian Development Bank raised its forecast for Vietnam's economic growth this year from 6.3 percent to 6.5 percent, while the World Bank reversed its prediction from 6.5 percent to 6.3 percent. Last week, the International Monetary Fund also lowered its forecast to 6.3 percent from 6.5 percent.

In an interview with Bloomberg in late May, Prime Minister Nguyen Xuan Phuc said he is confident that Vietnam's economic growth will meet the goal of 6.7 percent, despite weak expansion in the first quarter.