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Two major pressures of the SBV

Two major pressures of the SBV

Tuesday 18, 02 2020
There are two clear pressures that need to be dealt with before the SBV determines whether to continue monetary easing.

On 18th February, the Singaporean Government will launch a budget package to support its economy in the context of the negative effects of the Covid-19, which is estimated to be more than 500 million USD.

Singapore is the next Asian country expecting to have specific solutions by using fiscal and monetary policies.

Before that, China has obviously implemented short-term loosening policies to stabilize the economy in the context of the epidemic, Thailand has reduced interest rates, Malaysia has considered launching economic stimulation package, and Japan has also considered its enterprises supporting solutions package.

What about Vietnam?

Until now, in terms of fiscal policies, Vietnam has made the first move by exempt the import taxes regarding several goods sectors, including medical supplies and equipment used to deal with the epidemic. Regarding monetary policies, the SBV has issued a document to consider restructuring debt, extending repayment term, interest rate exemption and reduction, etc. for enterprises in epidemic affected areas.

Several commercial banks have also implemented interest rates reduction and service cost exemption policies; agencies under or owned by the State Bank have also implemented the exemption and reduction of service fees. However, generally, the current monetary easing policy of strongly pumping money and sharply reducing interest rates is facing difficulties, as the SBV is facing two major pressures.

Two pressures

Two major pressures of the SBV

Firstly, the leverage ratio for the economy is likely to suffer double effects.

According to estimated figures, in 2019, the credit growth reached 13.7%, equaling a total outstanding credit to the economy of approximately 8.2 billion VND. The GDP scale at the end of 2019 was estimated at around VND 6 million billion, and the ratio of credit leverage to GDP was around 135-136%.

This rate has reached the highest level ever. This is one of the indicators that international credit rating agencies are interested in (in the latest rating session, the SBV has had to work and exchange specifically with a foreign credit rating organization regarding this indicator.)

The pressure lays partially in the aforementioned increase, as well as in the double impact as the GDP growth this year may decline because of the impact of the Covid-19 epidemic, making the balance of credit to GDP ratio even more disadvantageous.

The second pressure is the recent inflation increase pressure, including basic inflation related to monetary.

In January 2020, the Vietnamese inflation abnormally increased, reaching the highest figure in the last 7 years; the basic inflation also rose sharply. The word “escalation” has been more frequently used in several recent economic analyses, while in the past it was used only to talk about the inflation in 2010-2011.

Both January 2020 with seasonal factors and December 2019 have suggested the significant increase of basic inflation; and in February 2020, it is estimated to continue to show pressure. In the context of the impact of the Covid-19 epidemic, before expecting or waiting for some monetary easing, instead of letting money "flood" in the system to lower interest rates, the Bank must continuously withdraw its money back from before the Lunar New Year until now.

According to the update of the last trading day of last week (14/2), with the outstanding of treasury bills, the State Bank net has withdrawn approximately 86,000 billion VND. The fact that this growing balance obviously pays interest (2.65% / year) is also a noticeable point about the cost of the budget.

>> The potentials of the banking industry 2020


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