Vietnam’s Central Bank Lays Out Plans for 2015

HANOI—Vietnam’s economy is ending a difficult year on a positive note, recording higher-than-expected growth, despite challenges such as nonperforming loans in the banking sector.

The Southeast Asian country expects to record gross domestic product growth of 5.98% in 2014, up from the government’s initial target of 5.8% and higher than last year’s 5.42% rate. Inflation, meanwhile, is at its lowest level in decades at 1.84%, helped by falling global oil prices. The country’s export sector is buoyant, propelled by foreign investment from companies like smartphone manufacturer Samsung Electronics Co., which plans to put billions of U.S. dollars into mobile-phone production in Vietnam.

The growth data comes as a state-run asset management company continues to mop up bad debts after a decade of frenzied growth. Banks became hesitant to lend as defaults ballooned, enfeebling domestic demand and dashing growth prospects. 

So, what’s behind the optimistic outlook? The State Bank of Vietnam’s Deputy Governor, Nguyen Thi Hong, says it’s the central bank’s efforts to stabilize the banking sector and contain prices. The government is now targeting GDP growth of 6.2% for 2015 and targets inflation at 5% or less for next year. Ms. Hong recently spoke with The Wall Street Journal about the central bank’s plans to support faster growth in the coming year. Here are some edited excerpts.

WSJ: What are the central bank’s priorities for next year? 

Nguyen Thi Hong: We will continue to ensure macroeconomic stability while creating better conditions for higher growth. The central bank will keep inflation under control and continue to keep the dong value stable. This is in line with the central bank’s persistent policy over recent years. We are targeting a credit growth of 13%-15% for next year, higher than this year’s credit growth of 13%. With a targeted inflation of 5%, banks’ current interest rates are reasonable. 

I think Vietnam will continue to record a balance of payments surplus next year as the country remains an attractive investment destination. This year’s balance of payment surplus is around $11 billion thanks to a trade surplus, rising foreign investment and remittances. We will keep the dollar/dong exchange rate stable, with a possibility of moving within a 2.0% band in 2015. The central bank currently sets the exchange rate for the U.S. dollars at 21,246 dong.

WSJ: Can you talk about nonperforming loans and what the central bank will do about it?

Nguyen Thi Hong: Vietnam has been actively dealing with bad debt in the banking system, especially over the past year. Banks are made to put aside more money as provisions for bad debts and prevent new loans from going sour. Vietnam Asset Management Co. has been purchasing bad debts from banks. The company has bought about 100 trillion dong-worth of bad debts, some $4.68 billion, from local banks since its establishment in July 2013. The ratio of bad debt in the local banking system was reduced to 3.87% at the end of October from 4.17% at the end of June. We target to bring it down to 3.0% by the end of 2015.

Banks will have to keep putting money aside as provisions for bad debts while aiming at improving the quality of new loans. We are advising the government to work out new policies this year to help clean up bad debts, including allowing banks to sell their debts at market prices and encouraging foreign investors to purchase bad debts from the system. 

We will also enhance collaboration with relevant agencies to push up disbursement for projects using investment from the state budget and facilitate the extension of loans to small-size and medium-size enterprises. We will also continue to restructure the banking system, and weak banks are encouraged to voluntarily restructure themselves through mergers and acquisitions.

WSJ: Can you talk about the highlights of the central bank’s efforts in 2014?

Nguyen Thi Hong: We have met all targets set for this year. We managed to reduce bank interest rates by a range of between 1.5 and 2.0 percentage points this year, supporting business activities. Banks’ liquidity has improved significantly this year, though total outstanding loans rose 13% from last year. Confidence in the dong has increased, and we have managed to keep the dollar/dong exchange rate stable. The dong has been devalued by only 1% this year. 

I think improved credit quality is among the reasons behind a higher economic growth for this year. We have been funneling new loans to efficient production projects. One of our prominent achievements over the past year is having kept the foreign exchange and the gold markets stable. International rating agencies’ moves to upgrade their ratings on Vietnam has shown investors and business community’s confidence in Vietnam’s economic stability.

Tags: banking, economy, vietnam
Posted in Asia, Banking, Macro Economics, Funds