Major achievements of monetary policy regulation in 2014

Entering 2014, though macroeconomy showed positive signs, there remained challenges to monetary policy regulation and banking activities, namely difficulties in production and business, low capital absorption of businesses and the economy, and limitation in credit flow. The monetary policy regulation came under pressure as the economy was widely open, unexpected developments in the world economy took place, internal weaknesses in the economy were not completely solved, and complicated developments in the East Sea also caused big impacts on monetary and foreign exchange markets. These were extremely great challenges to the State Bank’s regulation of monetary policy to achieve its macro objectives and the roadmap to restructure the credit institutions.

Fully aware of difficulties and challenges and closely following guidelines of the Party and State on socio-economic development, and restructuring the economy in the period of 2011-2015, especially resolutions of the Party Central Committee, the Party caucus of the State Bank and the Bank leaders took drastic measures in guiding, regulating, promoting active participation, creativity, sense of responsibility and linkages among units in the sector while paying attention to coordinating with ministries, branches, local administrations and socio-political organizations to bring into play aggregate strength for the implementation of assigned tasks, stabilize monetary market and restructure the system of credit institutions and contribute to control inflation and stabilize the macroeconomy. Results showed that the monetary policy and banking activities did not only contribute to achieving the Government’s objectives in 2014 but also laid an important foundation for developing a stable, healthy and competitive banking system, an effective channel of capital for restructuring and transforming economic growth model of Viet Nam. Concretely:

First, the State Bank effectively organized and regulated monetary policy, and controlled monetary supply by issuing money to buy foreign currencies to increase foreign exchange reserves while supplying capital for housing loans, assisting bad debt settlement through flexible regulation methods (appropriately issuing/attracting money), well controlling money supply, and achieving the objective of inflation control (the inflation rate in December 2014 was up by 1.84% as compared with the same period of 2013. If excluding impacts of fuel price fall in the international market, low rise of food and foodstuff prices and low increase of prices of goods regulated by the State as compared with the previous year, inflation went up by 4.97%, close to the targeted inflation rate while the average inflation rate rose to 4.09%). This was the third consecutive year when low inflation was kept under control, inflation expectations also reduced and people were more confident in the Government and State Bank’s determination to reach the objective of inflation control.

Second, on the basis of close coordination between monetary regulation by quantity and prices (interest rate), the State Bank provided guidance to cut interest rates to 50% in the second half of 2011 and lower than the interest rates during the period of 2005-2006, helping drop costs of loans for businesses and households. It is noticeable that when the monetary market is stable, interest rates are no longer a competitive tool to win customers. Though the State Bank allowed liberalization of mobilization interest rates for duration over 6 month, the rates were stable; the yield curve took a distinct shape and presented an enabling environment for capital balance of credit institutions. This was an important point towards stable and firm development of the banking system in future.

Third, while the capital absorption capacity was low, the State Bank took measures, especially measures on credit and interest rates to remove difficulties for production and business, and provided consultancy to the Government for leading and implementing pilot credit programs on value-chain financing. As enterprises were facing difficulties in production and business, the economy’s capital absorption capacity was limited, the real estate market recovered slowly, credits organizations strove to expand credit programs, and removed difficulties for production and business, namely restructuring debts, reducing and exempting loan interests, considering new loans to effective loan seekers who were capable of repaying debts so that they could continue their production and businesses, and simplifying lending procedures. Prominent was the program to connect banks and businesses which was rolled out by the State Bank in close coordination with ministries, branches concerned and leaders of provinces and cities throughout the country. The program proved to be effective, facilitating enterprises to restructure their debts, got lower interest rates for their old loans and accessed new loans with low interest rates. By the end of the year, the credit growth reached 14% as projected since the early 2014. Credit growth quality was greatly improved and contributed effectively to renewing economic growth model in keeping with the Resolution of the 3rd Plenum of Party Central Committee, 11th Tenure. In 2014, though the annual credit growth stood at 14%, economic growth bagged 5.98% - a relatively high rate in the region and the world. Credit structure was positively transited focusing on production and business particularly in the 5 priority fields identified by the Government.

Fourth, the monetary policy was implemented in a consistent and persistent manner, aiming at inflation control, boosting confidence in Vietnamese currency, closely combining with communication and information to stabilize exchange rates and foreign currency markets, reducing "dollarization" of the economy and achieving a highest-ever state foreign currency reserves. It is remarkable that foreign exchange rates and market were maintained in 2014 even when China illegally positioned its Haiyang Shiyou 981 oil rig deep inside Viet Nam’s exclusive economic zone and continental shelf. At that time, the trend of keeping and changing to gold and foreign currencies posed potential threats to the market stability. The State Bank made quick response, organizing meetings with foreign banks to inform them of the normal and smooth sailing operation of the banking system, commit to stand ready to intervene by selling foreign currencies and take all measures to stabilize the market. The timely response of the State Bank helped people become more cautious before deciding any transactions of gold, foreign currencies, and deposits and contributed to rapidly stabilize the market. This did not only bespeak achievements in regulation in 2014 but emphasized that it is the achievements recorded during the recent 3 years gained confidence of enterprises and people in the State Bank’s capacity to regulate monetary policy.

Fifth, the gold market was basically reorganized and rearranged following the Party and State’s guidelines. Gold was no longer a tool of payment in the market; gold bar attractiveness dropped; the gold market was stabilized; there was no “gold fever” causing social instability like before; the State Bank no longer had to use foreign reserves to intervene in the market; the “goldernization” of the market was put under control; part of iddle capital in gold equivalent in the economy was changed into money for socio-economic development.

Sixth, the restructuring of credit institutions and bad debt handling basically progressed according to roadmap and were a bright example in the Program on restructuring of the economy. By taking synchronous and drastic measures to restructure the credit system along with flexible monetary policy regulation, the State Bank ensured normal operation of the credit system; the danger of system collapse and insecurity was repulsed; payment capacity of credit institutions was improved; State property and people’s deposits were secure; social and political security and safety were maintained; weak credit institutions underwent voluntary mergers and restructuring as approved by the State Bank. The State Bank has yet resorted to legal and compulsory intervening measures; the people were confident in the Party and State’s guidelines and policies on restructuring credit organization. By now, the system of credit institutions has been restructured and rearranged in terms of stocks (a reduction of 5 commercial banks) and two other non-banking credit institutions were merged and dissolved); financial capacity and competitiveness of the credit institution system have been improved. The credit institutions reduced their bad debts by 53.6% through their own efforts, and by selling bad debts to the Vietnam Asset Management Company (VAMC). The operation model of VAMC has initially proved to be effective in resolving bad debts of credit institutions and supporting customers overcoming their difficulties, and confirming the correct choice of using this tool in resolving bad debts. In face of economic difficulties, the restructuring of weak credit institutions by using mainly resources from the private sector, ensuring safe operation of the banking system, maintaining the same level of investment without disrupting banking services were great efforts of the banking system which were highly appreciated by the public, people and the Party and State. Successful bad debt settlement constituted a recognition of the credit institutions’ efforts, particularly when no financial support came from the state budget, and limitations and constraints in mechanism and policies, and bottlenecks in the economy remained.

The outstanding achievements of the banking branch over the past period was conducive to raising Viet Nam’s sovereign credit ratings in the world (Fitch upgraded Viet Nam’s sovereign credit ratings to 'BB-' from 'B+', and Moody’s raised it from B2 to B1) helping Viet Nam successfully issue sovereign bonds in international capital markets in November 2014 with all-time low interest rates and save from lower payment of bond interests.

Objectives and tasks of monetary policy in 2015

The year 2015 is the last year to implement the 5-year plan in the period of 2011-2015, when Party congresses at all levels will be organized in anticipation of the 12th National Congress of the Party, the prerequisite task of the political system is to maintain macroecnomy and good development trend. Based on assessment of the world and national macroecomony, the National Assembly set up targets to control inflation rate at 5%, and economic growth of 6.2%. This is not an easy task given the world economy continues its recovery though not really promising because it lacks economic development driving force from developing countries; in the financial market, risk is lurking due to the possibility of the US’ long-term interest rate increase resulting in soaring value of the US dollar; Viet Nam’s economic growth is projected higher than 2014 with positive economic transition. However, world oil price fluctuation, and local goods price adjustment have exerted influence on efforts to control inflation in 2015.

With determination to successfully fulfill the set objectives for the period of 2011-2015, implementing Resolution 1/NQ-CP dated 2 January, 2014 of the Government on major tasks and solutions to implement the socio-economic development plan and state budget estimation in 2015, the State Bank affirms to be consistently in its efforts to control inflation, stabilize macroeconomy, support rational economic growth and ensure safe operation of the banking system. Major tasks in monetary policy regulation and banking operation in 2015 focus on:

First, regulate synchronously monetary policy tools, particularly interest rate and exchange rate in conformity with macroeconomic development, and money to stabilize interest rate and exchange rate and stabilize monetary and foreign currency markets; and conduct monetary control to support both inflation check and economic growth. Closely combine monetary policy with other macro policies in keeping with the Regulation on coordinated management and regulation of the macroeconomy between the State Bank and the Ministry of Planning and Investment, Ministry of Industry and Trade and Ministry of Finance.

Second, the banking system continues to take credit and interest rate measures to remove difficulties for production and business, ensure credit regulation through credit expansion and effectiveness, link with branch credit policy and economic sectors to supply sufficient capital for production and business, especially to priority areas identified by the Government, while contributing to raise economic growth rate to 6.2% in 2015.

Third, concentrate efforts on resolving bad debts, aiming at a bad debt reduction to below 3% by the end of 2015, actively coordinate with concerned ministries and branches to overcome difficulties and obstacles, particularly those relating to VAMC’s purchase and sale of collateral and bad debts in the market, and assist credit institutions to clean up and sell their bad debts to VAMC.

Fourth, continue restructuring measures according to roadmap to improve and enhance the financial mediatory role of credit institutions for effective capital flow in the economy. Complete the plan on merging credit institutions already identified in 2015 (from 6-8 credit institutions) with active participation of commercial banks having State capital and other big joint stock commercial banks, closely follow each credit institution after the merger to ensure its stable operation.

Difficulties and challenges in 2015 as well in following years will be numerous. However, with its achievements over the past three years and the Party, State and people’s trust, the State Bank is confident to coordinate with ministries, and localities to successfully fulfill its objectives and tasks in the period of 2011-2015, facilitate Party congresses at all levels in 2015 in anticipation of the 12th National Party Congress in 2016.

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This article was published on Communist Review No 869 (March 2015)