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Vietnam: Will interest rate cuts, debt restructuring and tax cuts foster economic growth?
Agencies have recently launched fiscal and monetary policies expected to serve as a strong push to help the economy escape the risk of growth decline.
On May 24, the State Bank of Vietnam (SBV) said the agency released Directive No 2 on strengthening lending, adjusting debt payment deadlines and keeping debt groups unchanged in an effort to support clients in difficulty as per regulations in Circular 02/2023.
Under the circular, credit institutions will assess loans of institutional and individual clients who cannot pay due principal and interest because their revenue and income has decreased in comparison with the credit plan. Debt payments will be extended by 12 months. Commercial banks will not have to make debt classification adjustments.
The circular will be valid until June 30, 2024.
On May 23, SBV released a statement on lowering some operating interest rates, starting from May 25. This is the third time in three months that the central bank has adjusted operating interest rates.
In the latest move, SBV eased the refinancing interest rate from 5.5 percent to 5 percent per annum, and the overnight interest rate in interbank electronic payment from 6 percent to 5.5 percent.
Meanwhile, the ceiling interest rates of deposits with a term from 1 to below 6 months have been lowered from 5.5 percent to 5 percent.
Prior to that, in mid-March and early April 2023, the agency adjusted some types of operating interest rates twice.
SBV also requested banks to continue practicing thrift to ease lending interest rates and different kinds of fees in order to support enterprises and people; and accelerate disbursement of the VND120 trillion preferential credit package to support the development of social housing projects.
On May 24, the government submitted to the National Assembly a plan on cutting VAT by 2 percent, from 10 percent to 8 percent, applied to some kinds of goods, starting in the second half of 2023. The tax cut is not applied to telecommunications, real estate, securities, insurance and banking products.
Experts said the interest rate cuts will pave the way for the lending interest rate to decrease, thus helping reduce capital costs, improve business results, and encourage people’s consumption.
Meanwhile, the VAT reduction, according to Minister of Finance Ho Duc Phoc, aims to stimulate demand and help production to recover soon.
However, despite the good news, investors are cautious with their investments. The VN Index decreased by another four points on May 24 to 1,062.79 points. All bank shares saw prices decrease, and so did finance, insurance, securities, retail, and consumer goods prices. Only several real estate shares saw prices increase.
Positive signs in long term
According to ACB Securities, the central bank’s move of cutting interest rate is a necessary condition, but not a sufficient condition to boost Vietnam’s economic growth.
ACB Securities says that production and consumption are the two important areas in the national economy. Currently, both are facing decline. People don’t have demand to borrow money to spend, and businesses don’t intend to get loans to expand production.
Therefore, the interest rate cut may not have much significance without growth in demand for production and consumption.
Production mostly depends on large trade partners such as the US, EU, Japan and South Korea. In other words, Vietnam’s economy may have to wait for the recovery of consumption demand from trade partners.
When production recovers, demand for domestic consumption will recover, and this is the sufficient condition to foster growth in 2023.
Huynh Minh Tuan, the founder of FIDT JSC, said that the SBV’s move of cutting operating interest rates will bring positive effects in the long term.
However, operating interest rates are reserved for tier-2 markets (between credit institutions and SBV). Possible impacts on the economy via tier-1 market won’t be too big if the interest rate reduction is separate. The system of commercial banks depends more on money supply and credit room rather than operating interest rates.
According to FIDT, when the economy is on the downturn, capital absorption capability will be weaker. When the risk increases, credit conditions will also be stricter. Therefore, policies need to be designed to match with the increase in capital absorption capability of the economy.
Manh Ha
Source: https://vietnamnet.vn/en/will-interest-rate-cuts-debt-restructuring-and-tax-cuts-foster-economic-growth-2149241.html