Accomodative Monetary Policy Support for Vietnam’s Economic Recovery

Diep Nguyen

This prudent monetary policy was partly accommodated at the outset of the COVID-19 crisis, when the authorities decided to provide breathing space to the real sector.

Accomodative Monetary Policy Support for Vietnam’s Economic Recovery
Photo: Quantas
Monetary policy has become more accommodative in the face of the crisis. The State Bank of Vietnam has anchored its monetary policy on the objective to stabilize the value of the currency reflected by inflation.
Domestic interest rates were stabilized, while credit expansion was regularly reviewed and adjusted by the monetary authorities. This prudent monetary policy was partly accommodated at the outset of the COVID-19 crisis, when the authorities decided to provide breathing space to the real sector. 
As part of the overall support plan, the SBV lowered policy rates in March by 100 basis points, in May by 50 basis points, and then again on October 1, by 50 basis points. 
It also granted flexibility to banks on provisioning requirements and forbearance to clients on loan terms to help banks and the banking system weather the crisis.
This transition to more accommodative monetary policy was facilitated by better inflation performance.
The main risk with a countercyclical policy is increased inflationary leading to depreciation pressures.
Headline inflation was only 2.5 percent in October 2020, comparable to October 2019. It has been moderating since the first quarter of 2020 and has been relatively flat since June, reflecting the softening of the domestic demand in general and the record low oil price on international markets that was transmitted to domestic fuel and gasoline prices. 
Food prices, after a surge in the first quarter, started to decline in the second half of the year as uncertainties around food supplies during the crisis faded and increases in international rice prices moderated, with markets remaining well supplied. Since 2016, the SBV has operated and announced daily flexible exchange rate, managing the value of the local currency by using the following three criteria: (i) the weighted average interbank rate; (ii) currency movements in
Vietnam’s key trade and investment partner countries; and (iii) macro-economic balances. 
Meanwhile, after appreciating by 4.0 percent in 2018, 4.7 percent in 2019, and 1.9 percent in the first five months of 2020, the real effective exchange rate (as measured by the World Bank’s methodology for a basket of major trade partners) depreciated by about 5.5 percent between May and November, mainly as the result of the depreciation of US dollar compared to other major currencies in recent months.
The accommodative monetary policy and temporary financial relief measures have been partly successful. On the one hand, it maintained the credit expansion 3 to 3.5 times higher than GDP growth and so channeled funds to companies and households to protect them from the fallout of the economic slowdown. 
On the other hand, the rate of expansion of credit slowed from above 11 to 12 percent (y/y) before the crisis, to 10.2 in September and 9.6 percent in October. The lower credit expansion is associated with lower demand by firms and higher risk during the economic downturn.
Another positive development is that customer deposits have continued to grow during the year. Customer deposits registered 12.4 percent (y/y) in September, demonstrating the trust of customers in their financial institutions. As a result, liquidity remains abundant in the domestic financial market. 
This abundance, together with the slower expansion of credit, may explain the active domestic issuance of corporate bonds recorded to date and the recent performance of the local stock market that climbed to a 10-month high in mid-November, despite a net foreign portfolio capital outflows in the equity market of about US$565 million during the first 10 months of 2020.