The SBV continues to manage interest-rates in line with the objective of macroeconomic stability in 2016

 

 

In reviewing the important success of the new foreign-exchange management scheme, Mr. Bui Quoc Dung said that after the SBV had implemented the new scheme, the foreign-exchange rate decreased sharply to end at a much lower level than at the close of 2015. Speculation and the hoarding of foreign currencies had reduced significantly and the liquidity of the money market was good. Positive movement on the domestic forex market was recognised in the context of strong fluctuations on the international financial market, the strong depreciation of the Yuan, the Chinese security market slide of 7% between January 1-7, and as oil prices hit a low of USD 32,16/barrel.

 

Further positive movement in the forex market over the last two months also demonstrated the initial success of SBV’s new scheme for foreign-exchange management. The most successful feature of the new scheme is the improvement in the domestic forex market's ability to absorb external shocks and the significant reduction of negative effects on the exchange rate. At the same time, new methods of exchange-rate management also helped to reduce speculation and the hoarding of foreign currencies, and encouraged organizations and individuals to sell foreign currencies for VND and unlock previously speculated foreign currency resources.

 

Addressing the belief that the sharp decreases in foreign exchange-rates at the beginning of the year had mainly been caused by the strong inflow of foreign currency remittance, Mr. Bui Quoc Dung emphasized that the new scheme has improved the capability of the domestic forex market to absorb any external shocks and reduce the negative effects of external markets on the domestic exchange-rate. As a result, the inflow of foreign currencies has been sold to credit institutions to create supply-resources for the domestic market. A large sum of hoarded currencies has been unlocked following the application of SBV’s new regulations. In spite of a high increase in business payment demands, especially in the first 3 weeks of January, the system of credit institution was still available to sell foreign currencies to the economy. However the selling did not create pressures to push up the exchange rate as on previous occasions. In fact, the foreign exchange-rate has fallen sharply, because market psychology has changed from an expectation of foreign exchange rate increases to the assumption of a stable exchange-rate.

 

Predicting the trend in exchange-rate movements in 2016, Mr. Bui Quoc Dung said that, prior to the application of the new exchange-rate management scheme, many organizations and economists expected the 2016 rate to rise by 5 -7%. In fact, once the new scheme was launched the forex market moved stably, the exchange-rate reduced sharply and exchange-rate forecasts also changed. Specifically, Standard Chartered Bank adjusted the forecasted exchange rate increase by 1- 2 percent in 2016, HSBC's expected exchange rate increased by 3-4 percent, while a number of economists predicted the exchange rate to rise by 3 percent.

 

The reason for the reduction in the exchange-rate forecast is that at the beginning of the year, the domestic market had positively accepted the new method of exchange-rate management, the motivations for speculating and hoarding foreign currencies had been gradually eliminated, and all transactions had been operating smoothly. Increased exchange-rate flexibility has reduced any negative effects from external shocks and there is greater support for the competitive capability of Vietnamese commodities. It is strongly believed that, with decisive SBV regulation, the fluctuating exchange rate in 2016 will remain under the control of the SBV, ensuring macroeconomic stability and supporting economic growth as the set aim of the Government.

 

Regarding the orientation of interest-rate management in 2016, Mr. Dung asserted that by end of February 2016, the average rates were commonly 6-9% p.a for short-term loans; 9 - 11 % p.a for medium- and long-term loans. The lending rate reduced by 0.2 – 0.5 percentage point p.a in comparison to the beginning of 2015, of which the rate for medium- and long-term loans reduced by 0.3 – 0.5 percentage point p.a, equivalent to a half of the common interest- rate level at the end of 2011, and lower than the interest-rate level for 2005 – 2006 when economic growth was stable.

 

In the context of 2016, with forecasted unfavourable movements on international financial markets, the high pressures of mobilising government bonds and an increasing demand for medium- and long-term loans, the pressure on interest rate management is predicted to be very strong.

 

First, the inflation rate is forecasted to be around 4 -5 %, much higher than the 0.6% rate of 2015, and this may indirectly create pressure on mobilising interest rates.

 

Second, the set objective of economic growth for 2016 is 6.7%, higher than that of last year's 6.68%, and much higher than the average level for the period 2011 – 2015 (5.58%), suggesting that credit demand in the economy will continue to increase.

 

Third, the interest-rate of 5 year government bonds sharply increased from 5.4% to 7.0% in 2015, together with the forecast for the higher mobilised demand of this bond in 2016 would create strong pressures on the interest-rate for medium- and long-term loans.

 

In these challenging circumstances, the SBV will continue to decisively manage synchronous measures of monetary policy, flexibly regulate money-flows via the open market, and utilising other policy instruments for managing liquidity-supporting credit institutions. This will help supply capital for the economy in parallel with the effective management of interbank interest-rates at an appropriate level compared to the interest-rates of the primary market, in order to ensure liquidity for the banking-system while stabilising the mobility and lending interest-rates of credit institutions, controlling inflation and eliminating pressure on the exchange-rate.

 

In addition, the SBV will continue to pursue a range of measures and instruments in line with the macroeconomic movement and practical conditions of the monetary market, with the aim of accelerating the regulation of interest-rates in line with monetary-policy objectives towards a small reduction in medium- and long-term interest rates.

VMH