Monetary policy is creating confidence for investors.

The gold price storms are no longer present, the race for deposit interest rates has begun to cool down. The initial successes of the monetary policy implemented in the past six months are creating important confidence for investors in the stability of the macro economy and the currency market in the last six months of the year.

Market cools down

According to the State Bank's assessment, the foreign exchange market has had positive changes, the foreign exchange status of commercial banks has improved, market sentiment has stabilized, and the free foreign exchange market has been tightly controlled.

The amount of foreign currency purchased by commercial banks is much larger than the amount of foreign currency sold. The average interbank USD/VND exchange rate is on a downward trend and the buying and selling rates of commercial banks are often lower than the average interbank exchange rate.

Remember on February 11, when the State Bank adjusted the average interbank exchange rate to 20,693 VND/USD, it inadvertently caused the domestic gold price to suddenly increase by nearly 1 million VND/tael on February 19; at the same time, it created a sense of insecurity not only for investors but also for people about the currency market at that time.

Illustration photo: VNA

However, the sudden increase in gold prices was quickly pushed back after a series of resolute and tough measures by the State Bank such as stopping the mobilization and lending of capital in gold; coordinating with competent authorities to strictly control foreign currency exchange points... The domestic gold market is strictly controlled. At many times, the domestic gold price is lower than the world gold price because holding gold has lost its appeal.

Therefore, since the beginning of May, the selling price of gold has been relatively stable, remaining around 37.5-38 million VND/tael. The main point to note is that the price difference between the previous day and the next day is always low. If calculated from June 1 to June 30, the gold price only increased by 120,000 VND/tael, standing at 37.85 million VND/tael.

Not only the foreign exchange market, but also the interest rates in Vietnamese Dong have recently begun to show signs of cooling down. The race for deposit interest rates among commercial banks is slowing down. If in mid-May, the deposit interest rates at many commercial banks were commonly up to 18-19%/year or even higher, recently they have been gradually decreasing by 1-2%/year.

According to the latest report of the State Bank, as of June 10, 2011, commercial banks' capital mobilization increased by 2.37%; of which capital mobilization in Vietnamese Dong increased by 1.15%, capital mobilization in foreign currency increased by 8.89%. Outstanding credit to the economy increased by 7.05%, of which credit in Vietnamese Dong increased by 2.72%, credit in foreign currency increased by 22.21%; short-term credit increased by 6.17%; medium and long-term credit increased by 7.66%.

Currently, the average interest rate for Vietnamese Dong loans is about 18.74%/year, an increase of 3.4%/year compared to the end of 2010, of which, the interest rate for loans to rural areas and exports is about 17-19%/year; the interest rate for loans to other production and business sectors is 19.2%/year, the interest rate for loans to non-production sectors is about 22-25%/year. The USD interest rate is also relatively stable, of which, the USD mobilization interest rate is close to the prescribed ceiling, the average lending interest rate is at 6.4%/year, equivalent to the interest rate at the end of 2010.

According to the State Bank's assessment, the payment capacity of credit institutions is being ensured; the liquidity of Vietnamese Dong is gradually improving. However, to reduce deposit and lending interest rates to a lower level will certainly take more time.

Positive moves from operating policies

Faced with complicated developments in the currency market, since the beginning of the year, the State Bank has issued many documents and policies to end the mobilization and lending of capital in gold by credit institutions; foreign currency trading by economic groups and state-owned corporations in the direction of expanding the scope of implementation; requiring provincial and municipal branches to review, inspect, and revoke foreign currency exchange agency registration certificates for locations violating regulations on foreign currency exchange activities...

The State Bank also directed credit institutions to apply risk prevention measures in foreign currency trading, continue to implement control measures, limit lending, foreign currency payments for importing non-essential goods and require commercial banks to proactively meet people's legitimate foreign currency needs in accordance with the law.

In addition, the measure of limiting credit growth to 20% and reducing outstanding loans for non-production sectors to 16% has prompted commercial banks to reduce the speed and proportion of outstanding loans for non-production sectors, and to focus credit capital on production and business, rural agriculture, export, supporting industry, and small and medium enterprises.

Recently, commercial banks have also introduced business strategies in line with the direction of the State Bank. Specifically, the Bank for Investment and Development of Vietnam (BIDV) focuses on prioritizing capital for production and business development, agriculture, rural areas, exports, supporting industries, supporting small and medium enterprises, key state projects, and projects of enterprises to create a macro balance with a proportion of 85-87% of total outstanding loans. Control and minimize credit growth for non-production sectors, control real estate loan growth below 9% of total outstanding loans (including infrastructure projects); the proportion of securities loans below 0.5% of total outstanding loans).

This bank has allocated a loan turnover of 50,000-55,000 billion VND for export purchasing enterprises, twice as much as in 2010, increasing the proportion of loans for export purchasing enterprises to 5% of total outstanding loans and a loan turnover of about 165,000-170,000 billion VND for small and medium enterprises, 1.5 times as much as in 2010, increasing the total proportion for small and medium enterprises to 20% of total outstanding loans.

In mid-April, Vietnam Technological and Commercial Joint Stock Bank (Techcombank) officially launched a paper production and trading loan product. Paper production and trading enterprises will enjoy preferential deposit rates, maximum guarantees on the value of collateral assets and methods of managing mortgaged goods.

Many other banks such as the Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank) have earmarked VND50,000 billion for agricultural and export loans and an additional VND30,000 billion for supporting industries with interest rates 2-2.5% lower than current rates for VND loans and 0.5% lower for USD loans.

New signals

These signs of cooling will be the premise for the currency market to cool down in the last six months of the year. According to experts, this will be the most exciting time of the market because businesses need to buy USD to pay debts and the demand for foreign currency increases to import goods.

Grasping that reality, the State Bank requires credit institutions to make loans, restructure debt repayment terms, classify credit, set up risk reserves and use reserves to handle credit risks according to the provisions of law.

In addition, credit institutions are not allowed to take measures to conceal bad debts; at the same time, internal audits must be strictly implemented. The State Bank also recommends that credit institutions detect and promptly take measures to handle credit risks. For the State Bank branches in provinces and cities, they will temporarily stop considering requests to open transaction offices of credit institutions.

On the other hand, the State Bank has sent out a message that it will strictly handle cases where credit institutions build and implement a growth rate of over 20% in 2011. In cases where credit institutions do not reduce the rate and proportion of outstanding loans to non-production sectors according to the roadmap, the State Bank will apply a required reserve ratio twice the general required reserve ratio; at the same time, it will limit the scope of business activities in accordance with Directive 01/CT-NHNN of the State Bank.

The State Bank also added that in the coming time, the State Bank will focus on developing and completing many draft documents related to the new decree on gold trading management; circulars regulating the purchase and sale of foreign currencies by organizations, individual credit or regulations on foreign currency status of credit institutions licensed to operate foreign exchange to stabilize the market in a sustainable manner. These continue to be drastic and synchronous solutions in operating monetary policy in a strict and cautious manner to control the growth rate of total means of payment, outstanding credit, shifting credit structure and ensuring liquidity of the banking system in the last months of the year.

Economic experts believe that the initial success of the State Bank, along with its steadfast implementation of the goal of monetary policy management towards curbing inflation and stabilizing the macro-economy, will create a solid foundation to reduce interest rates and stabilize the foreign exchange market in a more sustainable direction.

According to VNA