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Interest rates ‘have hit a floor,’ may rise, ratings agency says   2009-05-09 - Bloomberg

Interest rates ‘have hit a floor,’ may rise, ratings agency says
The benchmark interest rate has probably reached “a floor” after a series of cuts, and borrowing costs may need to be increased as government subsidies spark accelerating loan growth, Fitch Ratings said.


The State Bank of Vietnam has lowered its key rate to 7 percent from 14 percent in October. Standard Chartered Plc predicted a month ago that policy makers would further reduce the rate to 5 percent by the end of June, in an attempt to bolster economic growth.

“Given the government’s needs and that we’re starting to see dong liquidity tightening in the market, rates at the moment appear to have hit a floor,” said Peter Tebbutt, a Hong Kong-based senior director at Fitch, in an interview Thursday in Ho Chi Minh City. “If anything, they may go up a bit.”

A government subsidy on loans, intended to help boost economic growth from the 3.1 percent first-quarter pace, has sparked a “new credit boom” in Vietnam, Citigroup Inc. said last month. Lending jumped about 11 percent from January to April, marking a sharp acceleration from a first-quarter increase of 3 percent, according to Fitch estimates.

The subsidy program “appears from April’s numbers to be too successful,” said Tebbutt. “It seems to be driving loan growth too much.”

The State Bank of Vietnam has apparently resisted government pressure for now to lower interest rates further, according to Sabine Bauer, a Hong-Kong based Fitch director.

Defending their ground

“The central bank in this regard has proved to be a strong voice,” Bauer said Thursday in HCMC. “In this debate, on the base rate, they have so far defended their ground.”

In addition to delaying potential non-performing loans, the Vietnamese government subsidy program may also have resulted in some borrowing being used to invest in property or stocks; in the creation of some fake projects to take advantage of the scheme; or in banks using “circular loans” to profit from it, according to Citigroup.

“The banks’ responsibility is to ensure that these are loans made to projects which are viable,” Bauer said. “But having said that, it’s very difficult for them to monitor where the money actually goes.”

In a report released last week on Vietnam’s banking industry, Fitch said “moral suasion” has encouraged banks to keep lending rates low, with authorities attempting to ensure a “reasonable level” of loan growth.

Still, with the spread between lending and deposit rates narrowing, the dong depreciating, and international demand for Vietnamese goods weakening, credit costs are set to rise, Fitch said in the report.

“You have the interest-rate subsidy, you have quite strong loans growth,” Tebbutt said. “Then you could possibly start getting inflation coming back. And you’ve got a government that needs to borrow a lot of money this year, particularly for its fiscal stimulus program. So with everyone borrowing, rates will go up.”

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