Vietnam’s surprise lowering of interest rates for the first time in three years may help to support economic growth, but raises credit risks in a nation still grappling with a hangover of bad debt.
The central bank reduced the refinance rate by 25 basis points to 6.25 percent last week, and also lowered the discount rate to 4.25 percent from 4.5 percent. The changes come into effect on Monday, the State Bank of Vietnam said on its web site.
“These rate cuts will make it cheaper for businesses and individuals to borrow, so it will help spur loan demand and bolster consumption,” said Do Ngoc Quynh, head of treasury at Bank for Investment & Development of Vietnam in Hanoi. “Vietnamese companies still highly rely on bank lending. We just need to be mindful about how the loans will be used to avoid increasing bad debt.”
The policy easing came a day after the International Monetary Fund (IMF) said the central bank should remain on hold, stressing the need to contain rapid credit growth. Vietnam remains vulnerable because of the slow pace of its banking sector reforms, the IMF said.
The central bank said in its statement that the move was to help boost economic growth and keep inflation under control. Vietnam is among the fastest-expanding economies in the world, but growth is still below the government’s ambitious target of 6.7 percent. Annual inflation eased to 2.54 percent in June, the slowest pace in almost a year.
Vietnam has done much to overhaul its banking system since 2012, after a lending spree and weak controls led to a surge in bad debt. The central bank in 2013 set up the Vietnam Asset Management Co. to buy banks’ bad debt. Nonperforming loans, at 17 percent at the time, dropped to 2.6 percent as of March and the government aims to keep it under 3 percent.
While the asset quality of Vietnamese banks has improved, there is a risk some new loans could sour, according to a Moody’s Investors Service research note. Bad loans at Vietnam banks were 6.8 percent of total loans as of the end of 2016, Moody’s said.
“The government has spent some time stabilizing the economy and now the macroeconomic situation is stable, favoring easing monetary policies for growth,” Nguyen Ngoc Anh, chief economist and chairman of the Development and Policies Research Center in Hanoi.
“However, it’s crucial to be more prudent with fast-lending growth and vigilant about where the money is going to avoid having bubble markets in property and equities and the quickening of inflation, which we experienced in the past,” he said. The IMF reported that its estimate of impaired loans at Vietnamese banks had decreased to 8.4 percent of total loans at the end of 2016 from 12.7 percent in mid-2015
The central bank’s target for credit growth this year is 18 percent. The banking system had about 345 trillion dong ($15.2 billion) of unresolved bad debt as of December 31, 2016, according to the central bank.
Lawmakers last month endorsed rules that would help clear non-performing loans from the banking system. Banks would be able to sell bad loans and the assets backing them with fewer restrictions than presently imposed, speeding up the disposal process.
Even with the rate cuts, the government’s growth target will be hard to achieve as trade momentum eases, said Eugenia Victorino, an economist at Australia & New Zealand Banking Group Ltd. in Singapore. ANZ recently lowered its growth forecast for Vietnam to 6 percent from 6.4 percent.
“Even as export growth has remained buoyant, the reemergence of a narrow trade deficit this year implies a lower net contribution of trade to overall growth,” Victorino said in a note.