Reasonable interest rates - leverage to recover the economy

Businesses need a lot of support to recover and develop. Photo: H. Anh

Therefore, to support economic recovery and smooth capital flow, reasonable interest rates will be an essential leverage.

Erosion of competitiveness

According to the assessment of Dr. Nguyen Tu Anh, Director of the General Department, Central Economic Commission, high interest rates are negatively affecting the competitiveness of Vietnamese enterprises. This will pose a risk to newly established businesses, and existing units will have difficulty accessing capital and investment. In the context that the economy in the first four months of the year is showing signs of serious decline, especially in Vietnam’s industrial centers, export processing and export centers, the main engines and driving force centers of Vietnam's economy are seriously affected. It can be said that high interest rates directly impact investment demand, business, and capital market, and are one of the channels that directly affect the economy.

Analyzing this issue more closely, Anh said that the current interest rate was high. The average interest rate of banks is up to 12-13%, even some units give loans with an average interest rate of more than 14.6%. Notably, interest rates started to increase from July 2022 to February 2023 and continued to stay high, eroding Vietnamese enterprises' competitiveness.

“According to the State Bank of Vietnam, the average credit balance in 2022 was VND1,135,100 billion with an average lending interest rate of 10%/year. Particularly, the interest expense of Vietnamese businesses and people has suffered at least VND1,135,091 billion, equivalent to 12% of Vietnam's GDP in 2022. If the lending interest rate decreases by 1%, the support for the economy will amount to more than VND113,000 billion, larger than the packages of the Recovery program," said Anh.

Compared with China's interest rates, it can be seen that interest rates in China have fallen sharply since July 2021, the average lending interest rate in China in December 2022 was 4.14% and in the 12/2008-12/2022 period, the average lending interest rate was only 5.62%. Notably, since being affected by Covid-19, lending interest rates in China have continuously and quickly decreased, thereby helping Chinese businesses recover strongly after the pandemic.

Thus, in terms of capital costs, Vietnamese enterprises cannot compete with Chinese enterprises; neither does technology; no economic advantages of scale; no economic advantages of industry linkages that create large industrial areas; logistics costs are not competitive. That means the chance for Vietnamese enterprises to compete with Chinese enterprises is zero. Therefore, if Vietnamese enterprises cannot compete with Chinese enterprises in the short and long term, the competitiveness of Vietnam's goods production will face difficulties.

To support Vietnamese businesses to overcome these troubles, Dr. Nguyen Tu Anh recommended that it is necessary to have drastic policies between the banking and finance industries so that in the short to medium term, the Vietnamese interest rate must be lowered to improve the competitiveness of Vietnamese enterprises.

Balancing financial risks with economic recovery support

According to the Vice Rector of the University of Economics (Hanoi National University), Assoc. Prof. Dr. Nguyen Anh Thu, interest rate is a big issue, having a profound and broad impact on the development of Vietnam's economy, as well as on policy making. According to her, high interest rates will greatly affect production, business activities, and business development indicators. Notably, high interest rates not only affect the competitiveness of existing businesses but also affects the need to start and establish a business because they will make start-up costs increase, making people who want to start a business falter.

According to Thu, reasonable interest rates are considered an important lever to promote the production and circulation of goods, promote economic development and vice versa. Interest rates are a huge issue, having a profound impact on the development of Vietnam's economy and policy making.

Since 2021, along with the recovery of major economies after the Covid-19 pandemic, inflation has remained high in many countries. “However, in our country, inflation was controlled at a low level. The CPI growth rate in 2022 was 3.15%, which reached the target set by the National Assembly of less than 4%. These results are possible because Vietnam has applied and adjusted policies flexibly and appropriately to proactively deal with inflation risks as well as internal and external risk factors”, said Thu.

Experts believed that the reduction of interest rates would promote production, competitiveness, and the development speed of the economy. However, manipulating interest rates is considered a tool of monetary policy. Monetary policy should maintain a state of adaptation to the current state of the economy, balance financial risks with support for economic recovery, and open the flow of capital. The State Bank of Vietnam always adjusts operating interest rates flexibly to ensure monetary policy objectives while harmonizing the interests of parties such as depositors, credit institutions, and borrowers.

Dr. Can Van Luc, BIDV's chief economist, said that Vietnam's interest rates in 2023 were still high because the money supply was low and many credit institutions were weak in 2022. It is forecast that 2023 will be a year of slower growth than previous years due to global political turmoil, trade and financial risks, and global economy instability. In this context, Vietnam's inflation will increase higher than in 2022. However, if the policy can be reconciled, Vietnam still has room to reduce interest rates in the second quarter of 2023 and its economy will grow well.

"The pressure of inflation, exchange rate, and interest rates in the world is decreasing and much softer than last year. Bank liquidity this year is better than the fourth quarter of 2022. By the end of the first four months of the year, credit increased by 3.05%, capital mobilization increased by 1.5%, which means people's money is still pouring into banks. Not to mention, if the disbursement of public investment increases, the outstanding debt of enterprises decreases, the bottlenecks are cleared, and the business environment is improved, Vietnam’s economy will grow well," said Luc.