Amidst current challenges – objective and subjective alike – fiscal policy has yet to deliver as good results as expected. Therefore, monetary policy should be more accommodative for economic growth, like the central bank’s recent interest rate cuts.

Quick response

In its report released on March 27, 2023, the World Bank warned that the average global economic growth may tumble to a three-decade low, at 2.2% a year until 2030, resulting in a “lost decade of growth” for the world. The WB is also keeping a close watch on the banking system given the interest rate hikes and monetary tightening that are putting developing economies in harm’s way.

On March 29, 2023, the General Statistics Office (GSO) estimated Vietnam’s first-quarter GDP growth at 3.32% year-on-year, which was barely higher than the rate of 3.21% recorded in the first quarter of 2020 when the economy was plagued by Covid-19, and far lower than the rate for all other first quarters in the 2011-2023 period. Worryingly, slowdown or even negative growth was seen in major localities that are economic drivers of the country and are home to dynamic private investors, local and international alike, such as HCMC, Ba Ria-Vung Tau, Bac Ninh, Vinh Phuc, Binh Duong, Dong Nai and Long An.

Only two days later, the State Bank of Vietnam (SBV) decided on March 31 to further cut key interest rates, having done so just a fortnight earlier. This time, the central bank reduced the recapitalization rate from 6% to 5.5%, while the deposit rate was reduced from 1% to 0.5% for call deposits and tenors shorter than one month, and from 6% to 5.5% for deposits shorter than six months. The lending rate for short-term credit in Vietnam dong extended to priority industries was also slashed by half a point, from 5% to 4.5%. All decisions on rate cuts took effect on April 3, 2023.

It had earlier been suggested that the SBV continue keeping a close watch on the forex rate, inflation and Fed moves in the coming months “so as to cut interest rates in the coming time, initially for the two interest rates that were kept unchanged in the recent rate adjustment, namely the ceiling rate for short-term deposits of less than six months and the recapitalization rate.” Now, that suggestion has been heeded to earlier than expected.

First, in the wake of a crisis in the banking system stateside, the U.S. dollar has weakened steeply on the global market, leading the Vietnamese dong currency to appreciate.

Second, inflation since early this year has decelerated as the consumption demand has waned due to the people tightening their purse string. Specifically, the CPI in March 2023 eased to 3.35% year-on-year from the peak of 4.89% in January, marking the second consecutive month consumer prices have softened.

Third, in its policy meeting ended March 23, 2023, the U.S. Federal Reserve (Fed) raised its federal funds rate by only 0.25 percentage point in line with most forecasts to relieve the pressure on the U.S. financial market that is seeing a high risk of more banks going bust. The Fed also hinted that it would raise interest rates only one more time this year, also by a slim 0.25 point, while observers predict that the Fed will start reducing interest rates late this year or in early 2024. In reality, the Fed has had to inject money lately to rescue banks facing a liquidity crunch.

Monetary policy will do

However, the quick, drastic move by the SBV is probably taken to address challenges and difficulties facing the Vietnamese economy. The grim situation is mirrored in the lower-than-expected GDP growth in the first quarter alongside the bearish indexes of manufacturing and investment as well as the rising number of enterprises exiting the market or suspending business or going bankrupt, which casts a gloomy picture for now and the coming time as well.

The Purchasing Managers Index (PMI) for Vietnam in March 2023 tumbled to 47.7 from 51.2 recorded in February, which is the fourth month in five recent months the reading is below the neutral 50.

The Ministry of Planning and Investment predicted hardships would continue in the second quarter, and called for new incentives in terms of tax and fee reduction and lower lending rates to stimulate growth and support production. Apart from fewer export orders since the fourth quarter of 2022 that have forced enterprises to scale down business and lay off workers, local enterprises have also been stonewalled by a dwindling cash flow, difficult access to funding sources, and sky-high lending rates, which cause borrowing costs to surge and erode their competitiveness.

Data from the GSO showed that as of March 20, money supply had grown a mere 0.57% against the end of 2022 (compared to 2.49% in the year-earlier period); mobilized capital at credit organizations had risen 0.77% (compared to 2.15% in the year-earlier period); while credit growth was only 1.61% compared to 4.03% in the corresponding period of 2022. Data updated to March 28 showed credit growth was still modest, at 2.06%. The low credit growth reflects the weakened demand for capital in the private sector, which would adversely affect economic growth.

Most analysts have lately agreed that the momentum for growth this year should come from an expansionary fiscal policy via strong public investment flow into infrastructure projects. However, amidst current challenges – objective and subjective alike – fiscal policy has yet to deliver as good results as expected. Data showed that disbursed capital from the State budget in the first quarter reached an estimated VND91.5 trillion, meeting only 13.4% of the year’s target.

In addition, though fiscal policy is considered the momentum for growth this year, the role of monetary policy should not be played down. If the Government steps up spending on large-scale infrastructure projects to drive up growth, but the private sector scales down business and the consumption demand shrinks due to high interest rates, then positive impacts and dispersion effects from public investment can be neutralized due to the abrupt contraction in the private sector.

Central banks in many countries may have seen negative effects from their monetary tightening policy. While many advanced economies have had to resort to monetary tightening to cope with high inflation, Vietnam to some extent has been successful in containing inflation, and therefore should not necessarily follow this path. With inflation put under control and the forex rate stabilized alongside ample liquidity among banks, the move by the SBV to cut key interest rates is expected to add momentum to economic growth in the rest of this year.

Besides the interest rate cuts, the expansion of credit targeting the right borrowers with assistance packages will also contribute to fueling growth. The SBV has recently instructed its branches in cities and provinces as well as banks to continue the subsidized interest rate program for enterprises, cooperatives and household businesses in line with Decree 31/2022 of the Government. Under this package, borrowers will enjoy a lending rate that is two percentage points lower than the normal rate, with a credit line totaling VND40 trillion.

The SBV said it would continue calling on commercial banks to further cut lending rates in the coming time, alongside debt extentions to support businesses. Regarding credits for the real estate sector, four major banks, namely Agribank, BIDV, Vietcombank and VietinBank, have agreed on a credit package of VND120 trillion targeting developers and buyers of social homes and projects to upgrade aging condo buildings. Interest rates under this program are some 1.5 to 2.0 percentage points lower than the average lending rate for medium- and long-term loans offered by these four banks to other borrowers.