Proactive, flexible and prudent in operating monetary policy

Tuesday, 2021-01-26 17:10:54
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The SBV lowers interest rates for three times in 2020 to timely support the economy in the face of the COVID-19 pandemic. (Illustrative image)
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NDO – The banking sector gained positive achievements in 2020, contributing significantly to national socio-economic development as well as creating a solid premise for the completion of tasks in the future.

Keeping stability amid turbulent context

The world has witnessed great fluctuations since March 2020 that have never been seen before due to the impact of the COVID-19 pandemic, which has also affectedmany aspects of social life in Vietnam. Playing a vital role in the economy, the operation of the banking systemcould not avoid the negative effects of the pandemic.

In that context, the banking sector proactively, flexiblyand prudently implemented solutions to operate itsmonetary policy, contributing to controlling inflation, stabilising the macroeconomy and supporting the economy in coping with the adverse effects of the pandemic.

The State Bank of Vietnam (SBV) sold its bonds toactively control the currency and inflation but still maintain available funds at a reasonable level, especially from mid-March 2020 (the first phase of social distancing).

The SBV also lowered interest rates three times in 2020 to support the economy in the face of the COVID-19 pandemic with a total reduction of about 1.5 to 2% peryear on operating interest rates, a total decrease of 0.6 to 1.0% per year on ceiling interest rates for deposits in Vietnamese dong under six months, and a total decrease of 1.5% per year for priority sectors. Vietnam's reduction of interest rates is currently one of the highest reductionsin the region.

The stable exchange rate continued to be a bright spot in 2020 despite the negative impact of the pandemic. The SBV flexibly regulated the exchange rate through announcing fluctuations of the central rate every day in accordance with domestic and foreign market developments, macroeconomic balance and monetary policy to limit speculation on and hoarding of foreign currencies and help the economy respond better to external shocks.

Up to now, the domestic foreign currency market has maintained its stable operation and positive liquidity while the legal foreign currency demand has been fully and promptly met. The SBV is also able to buy foreign currencies to supplement the State's foreign exchange reserves, helping ensure national monetary and financial security and consolidate Vietnam's credit rating.

The SBV also flexibly implemented credit growth to ensure a sufficient supply of capital for the economy. The credit balance of the whole banking system in 2020 increased by 11% compared to the end of 2019.

The restructuring of credit institutions and the settlement of non-performing loans continued to be conducted in a stable manner. The on-balance-sheet non-performing loan ratio of credit institutions was maintained at below 2% from 2017 to July 2020. However, the rate increased to 2.14% in late September 2020 and 2.09% in late October 2020 due to the impact of the COVID-19 pandemic.

The efforts of the banking sector in the process of restructuring and dealing with non-performing loanssignificantly contributed to ensuring the safety of banking operations, creating a sustainable macroeconomic foundation, and enhancing Vietnam's position in the international arena.

Facing many challenges

Monetary policy and banking activities achieved many important results in 2020, creating a premise fordevelopment in the coming years, but there are still many challenges in 2021, requiring the whole banking sectorfocus on addressing same.

They are the ongoing developments of the COVID-19 pandemic, the fragile recovery prospects of the world economy, the unpredictable developments of the global financial and monetary market, the movement of global investment capital flows, the imposition of tariff and non-tariff measures on Vietnamese goods and others affectingthe supply of and demand for foreign currencies and the domestic foreign exchange market.

These uncertainties make analysis and forecasting more difficult, posing great challenges for the management of monetary policy and exchange rates of the SBV.

International organisations have forecast that Vietnam’s economic growth rate in 2021 will be 4.5 – 8.1%, among the countries with the highest growth rates in the world.

However, the unpredictable developments of the COVID-19 pandemic and the application of lockdown measures on a large scale may have a negative impact on economic prospects in 2021.

Vietnam’s average inflation in 2021 is likely to be curbed at about 4% but will still face pressure and the risk of increasing. This requires a close and synchronous coordination between monetary policy and other macroeconomic policies, particularly the fiscal and pricemanagement policies of the State.

A prolonged coronavirus pandemic across the world will affect the global trade and investment activities with a negative influence on Vietnam’s import-export and tourism activities.

Due to the pandemic, credit institutions have had to reschedule, extend, and postpone debt repayment obligations for customers which can cause bad debt risks for credit institutions in the medium and long term and create pressure on the stability of the financial and banking systems.

In addition, the strong development of information technology and the industrial revolution 4.0 is posing challenges for payment operations and technology in the banking sector, especially in terms of the protection of personal data and the security and safety of information technology systems.

This requires a further improvement of the legal framework and mechanisms on non-cash payments to meet the development trends of new payment services and models.