Economic growth concerns as banks have excess money

Excess cash in the system is not only because credit cannot keep up with mobilization but also because of slow economic growth.

Commercial banks are having a lot of excess cash, which is clearly shown by the simultaneous decrease in interest rates. Overnight interbank interest rates are at their lowest level in history at 0.4-0.5% (in the same period in 2015, the interest rate was 3-4%). ​​The interest rate of State Bank bills has also dropped to a record low of 0.4% (in the same period, it was 3.5%). The interest rate on government bonds issued for 5-year terms has dropped sharply to 5.79%, the lowest level since June 2015.

Interest rates have fallen sharply, but demand from banks remains high. With State Bank bills, the issuance rate in August doubled that of July, and in just three months, the regulator has withdrawn VND64 trillion from circulation. With government bonds, the total issuance value as of September 14 reached VND211.5 trillion, higher than the issuance value for the entire year of all previous years.

Credit growth since the beginning of the year has been much lower than the growth of M2 money supply and mobilization. Source: State Bank, National Financial Supervisory Commission.

The phenomenon of “excess money” is not new and has occurred in 2013, 2014 and early 2015. One of the main reasons is that the growth of total means of payment and mobilization is higher than credit growth. Credit in the first 8 months of the year increased by 9.67% while the growth of total means of payment and total mobilization reached 10.5% and 11% respectively. Similarly, the amount of credit value added in the first 8 months of the year was also much lower than the other two indicators.

Behind this is a bigger reason, which is the slow economic growth, which has two consequences that affect the currency market. One is the decrease in credit demand, the other is the trade surplus. Thanks to the trade surplus, Vietnam has a larger overall balance of payments surplus and the State Bank has used VND to buy foreign currency for foreign exchange reserves. Since the beginning of the year, the operator has bought approximately 10 billion USD, equivalent to "pumping" out VND 230,000 billion. The same thing happened in 2013 and 2014. In 2015, when the economy grew faster, Vietnam returned to a trade deficit and the State Bank had to sell 6 billion USD from its reserves to stabilize the foreign exchange market.

With the slow economic growth - the root cause of the cash surplus phenomenon, the joy for stability in the currency market can hardly be greater than the concern about slow growth and above all the lives of millions of people. In addition, this surplus state is also quite fragile because Vietnam has a low domestication rate. When the economy grows strongly, the trade deficit will certainly return, leading to a decrease in money supply through foreign currency purchases for foreign exchange reserves.

The question at this point is when will Vietnam regain high growth? In 2015, after 3 years of low growth, Vietnam tried to return to the growth trajectory by loosening both monetary and fiscal policies. However, just one year later, growth fell sharply again. If we rush to stimulate again, we may fall into a spiral of trade deficit, exchange rate, inflation, and then it will take many years to fix it. A "perfect" solution for the current situation is to sell assets to foreign investors. On the one hand, the budget will immediately have a large source of money to reinvest in new projects, on the other hand, foreign exchange reserves will have more foreign currency, helping to stabilize the currency. The remaining problem is to use the money collected in the most effective way.

Director of Private Client Investment Analysis and Consulting
Saigon Securities Incorporation (SSI)

According to VNE