Financial Market: No Abusing Administrative Measures!

Saturday, April 12, 2008
The January-March consumer price index was at a 12-year high of 9.19 per cent. Taming inflation is now the top priority of the Government. Recognising the financial market and impacts of new policies to promote the rule of the market and to stabilise the consumer price is the topic of the interview between Dr Nguyen Dai Lai, senior economist of State Bank, and Viet Nam Business Forum. By Chau An.
It is undeniable that the Vietnamese financial market now has problems. Would you mind telling your viewpoints about this situation?
The Government has introduced important policies to cope with inflation. The US dollar badly depreciated but it suddenly appreciated on fear of the flight of indirect investment flows. The stock market is operated under the administrative regime. There are different perspectives on this phenomenon.
I think that the escalating consumer price index is attributable to two reasons: “inflation import” and demand surge. Regarding the inflation import, we know that the US Fed applies the weak US dollar to cope with the slowdown of the US economy. Soaring gold and oil prices result from the US economic recession and political tensions in some areas in the world. International payment in USD and the dollarization will cause inflation to soar when the US dollar depreciates.
Regarding domestic demand, the GDP growth of Vietnam mainly relies on investment increase. However, the investment is ineffective. The ICOR ratio of Vietnam is now deemed the highest in the region at 4.4, compared with the regional average of 2.5-3.5. The very high increase of total payment means caused expected inflation to be many times higher than nominal inflation.
The US dollar fell to the bottom level but surged in the last two weeks. There are three major reasons for this phenomenon. First, the State Bank of Vietnam (SBV) is ready to buy USD at commercial banks. Second, the trade deficit was at a record of US$7.3 billion in the first three months this year. Third, foreign banks may buy in USD to help foreign investors to remit profits to their homelands. The stronger USD is expected by local exporters but this makes inflation control more difficult. Thus, we should be cautious with this.
The stock market is rallying but the uptrend is the result of administrative intervention and the trading value is at record low. Only a small number of investors are still present on the market as the narrowed daily trading band limits the margins of investors. I feel that we pay too much attention to the rise and fall of the index. It means that we are concerned too much about the secondary market where low quality goods are dominating. We make light of two fundamental issues. First, the stock market is a channel to mobilise medium and long-term investment capital for the economy, which is long a responsibility of commercial banks. In fact, the stock market tends to focus more on issuance and trading of capital shares rather than debt securities. Second, the stock market should focus on developing the primary market where the high quality goods are profuse, not delaying it as now. In addition, the relation between the stock market and monetary market is very weak. The credit monetary market is investing in the stock market instead of relaying the stock market.
USD devaluates to a record level across the world and the US Fed repeatedly cuts interest rate, currently to 2.25 per cent. However, the USD interest rate in Viet Nam seems to increase and commercial banks have reached an agreement to keep the USD deposit interest rate below 6 per cent per annum. How can we resolve this paradox?
While the USD price on the domestic and global markets terribly decreased, the USD deposit and lending rates tends to keep rising. Even, the Vietnam Banking Association has to gather to reach a consensus of slowing down the USD deposit interest rate. This shows our problematic foreign exchange management regime. Many countries do not have foreign currency credit, especially short-term ones. In the past years, Vietnam still strongly developed foreign currency credit. This proves that we lack foreign currencies. The foreign currency credit raises the value of foreign currency capital even when the foreign exchange rate reduces. This is one of the paradoxes in foreign exchange.
To deal with this situation, I propose short buy and sell regime for foreign currency credit. It is necessary to gradually eliminate foreign currency credit regime, especially short-term credit, and develop derivative tools for enterprises to self-protect against exchange rate risks.
In the case of profuse foreign currencies as now, I propose allowing enterprises to issue foreign currency bonds. Giant economic groups are allowed to issue bonds to raise foreign currencies for business demand. These types of bonds are safe security assets for enterprises to borrow local currencies at commercial banks or let commercial banks use these debt papers to ask for cash supply from the State Bank. This mechanism helps stabilise the exchange rate and diversify the foreign exchange reserve structure at commercial banks and the State Bank. This amount of foreign currencies will be spent on renovating technologies and expanding production instead of borrowing from foreign sources. Foreign currency bonds help enterprises to carry out big projects without relying on the supply of foreign currencies from banks, which are tightening lending to curb inflation.
However, many worry about the exchange rate risk. Thus, both banks and enterprises choose credits instead of holding foreign currencies. Is the banking sector responsible for this?
Commercial banks self-balance the credit buy and sell markets. Some banks take foreign currencies on the buy/sell market to meet the demand on the lending market. However, using Vietnamese dong to buy USD and then lending USD exposes banks to risk in the event of USD/VND fluctuation. Therefore, most banks now do not use VND to buy foreign currencies for lending, but increase deposit interest rates to mobilise USD.
Definitive purchase and sell will increase the activeness of banks and enterprises and promote the market nature in foreign currency relations. Then, the State Bank will be the last buyer and seller on the market. This mechanism is much more complicated.
Uncommon derivatives showed that commercial banks are too weak in their services. At a recent seminar on developing derivatives, held by the Banking Development Strategy Department, hardly any commercial banks have strategies to develop this potential and common service in the world. To develop derivatives, the policy system must be complete, the information system must be developed and the enterprises should be provided sufficient knowledge. When enterprises use derivatives, they will have time to prepare their business deals, distribution systems, methods and modes of payment without paying attention to exchange rate fluctuation. When the USD devaluates, derivatives help enterprises avoid risk. At present, commercial banks develop many risk provision products such as future options. Using these products, enterprises can negotiate a suitable exchange rate in the future. This will help enterprises avoid unexpected loss in exchange rate fluctuation.
To curb inflation, apart from tightening public spending, the Government is pursuing a tightened monetary policy. What do you think about this?
A series of measures have been introduced by the Government and ministries to fight inflation, including sacrificing the growth goal. In my opinion, this is very high political determination. However, from the angle of market economy rules, I have doubts about the use of administrative solutions. Several policies introduced including sacrificing tax, lending securities investment, capping interest rate and limiting securities trading band have generated many reactions to support the fact that those administrative measures are not needed. For example, when the stock market plunges, investors dare not borrow money although banks offer. When the lack of liquidity is solved by the supply-demand law, no banks will join an interest increase race. When the price fluctuation limit imposed on securities trading is narrowed, investors will leave the market, supported by record low trading volumes and values. Thus, the employment of market rules is the most important policy in the battle against inflation and to maintain financial market stability. Policies should not directly affect market rules such as price, competition and the confidence of the public and investors.