ACBS Reducing operating interest rates is still not enough for economic growth

DNHN - ACBS believes that the State Bank's reduction of interest rates is a necessary but insufficient condition for promoting economic growth in Vietnam.

The State Bank of Vietnam (SBV) has recently issued a series of Decisions dated 23 May 2023 regarding the modification of interest rates effective 25 May 2023. According to ACBS, a reduction in interest rates by the SBV is a necessary but insufficient condition for promoting economic growth in Vietnam.

Accordingly, ACBS concludes that the Vietnamese economy's production and consumption sectors are currently experiencing a decline in activity. People will not need to borrow to increase spending, and businesses have no plans to borrow to expand production. Without an increase in demand for production and consumption, a reduction in interest rates may therefore have little effect.

Moreover, Vietnam's manufacturing industry relies heavily on major trading partners such as the United States, the European Union, Japan, and Korea. Consequently, we may be required to await a recovery in consumer demand from these major trading partners. When the manufacturing industry recovers, the domestic demand in Vietnam also recovers. These effects are only sufficient to boost Vietnam's economic growth in 2023.

On the other hand, the Government has recently intervened to support domestic consumption through other policies such as Decree 12/2023/ND-CP extending the deadline for payment of value-added tax, corporate income tax, etc. business, personal income tax, and land rental fees until 2023 and a proposal to reduce value-added tax (VAT) from 10% to 8% for all goods and services. The ACBS anticipates that these policies will mitigate the decline in domestic consumption.

In addition, the government has enacted policies favorable to the real estate industry and corporate bonds, which are anticipated to stimulate growth and liberate capital flows.

Lastly, the Government intends to increase public investment in 2023, which will also catalyze economic growth in Vietnam in 2023.

Recent State Bank (SBV) announcements include two decisions effective as of May 25, 2023. Accordingly, Decision No. 950/QD-NHNN, dated May 23, 2023, on refinancing interest rate, rediscount interest rate, the overnight lending rate in interbank electronic payment, and shortfall loan. The capital shortfall in the State Bank's clearing payment for credit institutions.

In particular, the interest rate for overnight loans in interbank electronic payments and loans to cover capital shortfalls in clearing payments of the State Bank for credit institutions decreased from 6%/year to 5.5%/year; the refinancing interest rate decreased from 5.5%/year to 5%/year; and only the rediscount rate remained unchanged at 3.5%/year.

In addition, Decision No. 951/QD-NHNN dated May 23, 2023, on the maximum interest rate for Vietnam Dong (VND) deposits by organizations and individuals at credit institutions by Circular No. 07/2014/TT-NHNN dated March 17, 2014.

Accordingly, the State Bank will reduce the maximum interest rate for deposits in Vietnam Dong (VND) of organizations and individuals at credit institutions as follows: the maximum interest rate applied to deposits with terms from 1 month to less than 6 months will be reduced from 5.5%/year to 5%/year; the maximum interest rate for deposits in VND at people's credit funds and microfinance institutions will be reduced from 6%/year to 5.5%/year with terms of 6 months or more as determined by the State Bank; and the maximum based solely on the supply and demand of market capital.

P.V (t/h)