An economist says that the recent petrol price hike is unlikely to affect the Government's target on curbing inflation to less than 10%.

Dr Vo Tri Thanh

Deputy Director of Central Institute for Economic Management Dr. Vo Tri Thanh made the claim at a workshop on Vietnam’s economic prospects held on April 21.

According to Thanh the a sharp decrease in domestic demand combined with the petrol price hike of VND1,000 per litre, together with decreasing interest rates and increased salaries this May won’t threaten the Government’s target.

However, decreasing interest rates would loosen monetary policy, which may lead to increased inflation. Domestic demand remains at a standstill now, and according to economic research, these changes in the economy won’t put the target of curbing inflation at risk.

Thanh affirmed, “According to our research, if petrol price rose 10%, and electricity is put up by 5%, and if domestic demand remains the same, inflation rate will rise from 2.3-2.5%. However, domestic demand is decreasing, so inflation rate won’t increase by such a high rate.”

Inflation is projected to reach 7-8% this year, leaving a 2-3% margin to deal with any sudden changes in the economy.

Monetary policies this year have been loosened compared to last year. Last year, credit growth reached 12%, while it has been expected to increase to 15-17% this year. The International Monetary Fund forecasted that Vietnamese was unlikely to see credit growth from 14-16% due to the fact that enterprises don’t want to borrow capital, or they cannot meet the banks’ requirement.

Therefore, to achieve such an optimistic rate of credit growth, enterprises and banks should sit together and co-operate by providing explicit information, classifying loans, guaranteeing credit, and restructuring enterprise debts.

In terms of the deposit rate ceiling, Thanh said, “There are three main opinions: The first is to abolish the deposit rate ceiling gradually, the sooner the better. The second is to abolish it after the State Bank has dealt with the nine unprofitable banks this May. The third is similar to the second, but after having dealt with those banks, we still apply a deposit rate ceiling of 15% for the next six months then abolish it completely after that. Enterprises can recover over six months, and State Bank of Vietnam can continue to deal with other loss-making banks. The third opinion can be applied to productive businesses, not real estate businesses, so I think it should be considered.”

Former Minister of Trade and member in PM’s advisory board, Truong Dinh Tuyen said he didn’t agree with some opinions that if the deposit rate ceiling was decreased to 12%, then after six months, the loan interest could be reduced. In fact, it wouldn’t be that long.

He continued, saying that a policy should be judged by the time taken to achieve the main final target, not intermediate stages. Reducing interest rates fosters economic growth, and this would take from 5-6 months. In terms of interest rates, that should be resolved in a month, not 5-6 months.

Tuyen also urged banks to reduce lending rates more quickly because credit packages they are offering were unable to meet the demands of the domestic economy.

Tuyen assessed, “If we want to decrease the deposit rate ceiling, liquidity has to be improved, and CPI need to be reduced further. CPI has been reduced, liquidity has also been improved, but not very well. Some large banks have redundant capital, but they cannot offer loans while many loss-making banks are suffering from a lack of capital and bad debts. We should deal with these bad debts to help capital circulate and maintain good liquidity in the economy in general and in banks in particular. There are enterprises in need of capital, but they cannot borrow from banks, or some enterprises can meet those requirements, but they don’t have a potential market to enlarge their business. We should pay attention to them. That will help reduce the interest rate ceiling.”

Opaque bank classifications

This year’s credit growth has been set at different levels among banks depending on their own financial situation.

Former Minister of Trade, Truong Dinh Tuyen

Tuyen said this method hadn’t been used by any countries in the world, but it suited  Vietnamese conditions.

“However, the policy is being carried out ineffectively. There is a fact that even loss-making banks which are saddled with bad debts are still classified at level 2.”