VietNamNet Bridge - The tightened monetary measures initiated by the government is yet to show results as far as the primary target – reining in inflation – is concerned.

The Consumer Price Index (CPI) for March was up 2.17 per cent over February and 13.89 over March 2009, the highest growth in a year.

The increase was mainly attributed to the 15 per cent electricity price hike that took effect at the beginning of the month and the two fuel price hikes that saw petrol and diesel oil go up 28 per cent and 35 per cent respectively by the month end.

Rising global commodity prices as well as high lending rates – 16 to 18 per cent for manufacturing firms and 18 to 22 per cent for non-production enterprises – have contributed a lot to pushing up local prices.

According to experts from Viet Nam Asset Management Ltd (VAM), which primarily engages in public and private equity investment and advisory services, these impacts on inflation will continue for a couple more months at a minimum. This outlook, and the fact that year-to-date CPI growth has already reached 6 per cent makes the Government’s target of keeping inflation down to seven per cent in 2011 look highly unrealistic.

On March 8, the State Bank of Viet Nam (SBV) raised the refinancing and discount rates to 12 per cent per annum from 11 per cent. With inflation not showing any signs of easing thereafter, on 31 March, for the third time this year, the central bank raised the refinancing rate to 13 per cent per annum while keeping the discount rate unchanged at 12 per cent, effective from 1 April.

The latest move of the SBV has put paid to rumours and, perhaps more precisely, expectations in the market that interest rates would be lowered soon to support production.

Despite the monetary tightening, total credit growth in the first three months was recorded at 5 per cent. As regards fiscal policy, the government maintained a firm stance on reducing public spending. If the inflation rate does not subside, further tightening measures can be expected from the government, such as raising reserves ratios for banks, of which rumours are already swirling.

The rate race

In recent days, unofficial interest rates on term deposits at many commercial banks climbed to between 17 and 18 per cent per year. The rates on non-term deposits also rose from 2 or 3 per cent to 9 or 11 per cent per year.

The interest rate race has returned and heated up further since the State Bank of Viet Nam decided to raise a series of prime rates including refinancing and overnight lending from 12 per cent to 13 per cent early this month.

Tension has heightened in the interest rate market after the increase in petroleum product prices, which has in turn seen prices of several essential goods go up.

Independent market watchdogs confirm that the interest rate race among banks has returned and the competition has become even fiercer.

They say the race is basically illegal since the central bank has set an interest rate cap of 14 per cent on dong deposits. However, the current deposit interest rate cap policy is not suited to market mechanisms, they add.

This is because in the current context of high inflation and continued devaluation of the dong, the interest rate on deposits is controlled while the lending rates are set afloat. This means the capital demand and supply in the market cannot be matched.

Because deposit interest rates are capped at an “unreasonable” level many people are reluctant to send their savings to banks, pushing banks to offer higher returns and attract cash so as to improve their liquidity.

Meanwhile, the Government’s measures to curb inflation do not appear to be successful because there is still a large volume of cash being circulated on the market. Unless Government policy gets closer to the actual situation on the ground, banks are likely to find new ways to attract deposits – and the interest rate race will continue.

High retail, higher deficit

The nation’s total retail sales and service revenues in the first quarter of the year have been estimated at a rather high VND451.8 trillion (US$21.5 billion).

Experts say such figures are evidence of improved living standards and the emergence of a middle class ready to spend big.

Another positive sign is that the high growth in retail sales would boost economic growth, but there is a negative side as well.

The fact that the retail growth is higher than that of local production means the extra consumption is fed by imports, hence a higher trade deficit.

In the last three months, the country’s retail sales and service revenues rose 8.7 per cent over the same period last year. The retail sales growth rate was 1.6 per cent higher than the GDP growth during the same period.

The gap between retail and GDP growth is an ominous sign, experts say.

In 2010 for instance, the GDP met only 90 per cent, or less, of the country’s capital needs for investment and consumption activities. Meanwhile, the ratio of savings to GDP was 28.5 per cent, much lower than the 41.9 per cent ratio of investment capital to the GDP.

The country’s trade deficit in the first quarter increased continuously, from $0.88 billion in Jan to $1.11 billion in February and to $1.15 billion in March.

With world inflation as high as it is at present, rising domestic trade deficit also poses the threat of “inflation import,” aggravating the situation at home.

Banks face tough task

Secondary investors are shying away from purchasing property due to high interest rates and a lack of liquidity.

Bui Tien Thang, deputy general director of Sai Gon Thuong Tinh Real Estate Joint Stock Company (Sacomreal), said that up to 70 per cent of potential homebuyers were in need of financial support to buy an apartment. However current interest rates were too high for them. With deposits attracting an average 14 per cent, many investors are considering putting their funds in banks rather than risking it on property.

Consequently, there has been a significant dip in the residential recently.

Le Hoang Chau, chairman of the HCM City Real Estate Association, said that property developers can ride through the storm of increasing input costs and high interest rates provided they find outlets for their products.

The problem is that the residential market has been very quiet, especially in the luxury sector, Chau said, adding most property developers would face tough challenges this year.

According to many bankers, it is not just property developers but also banks offering real estate loans that are facing difficulties. The latter have had to reduce their property loans to ensure a credit growth rate of less than 20 per cent by the year-end as required by the central bank.

Credit for the non-production sector at some banks are at 35 to 44 per cent of the total outstanding loans, twice the central bank’s requirement.

Trinh Van Tuan, general director of the Orient Commercial Joint Stock Bank, said that 32 per cent of the OCB’s total outstanding loans by March was in the non-production sector, majority of which was invested in real estate projects.

To keep this year’s credit growth of 20 per cent, OCB started to restructure its outstanding loans in ways that would halt loans for real estate and securities purposes, Tuan said, and adding that, “it will not be an easy job”.

Tran Phuong Binh, general director Dong A Commercial Joint Stock Bank, said, “With the policy of tightening real estate-backed loans this year, commercial banks will find it hard to promote lending to individual customers.”

Source: VNS