Government Bonds help lower interest rates

SBV also handicapped

When it comes to considering the lowering of interest rates to support or boost the economy, the State Bank of Vietnam draws most attention, even though it is also handicapped by a limited number of tools. Pumping capital into the open market has reduced interest rates on the interbank market to the lowest level, thereby pushing deposit rates of many banks down. This tool is inherently traditional and comes with limitations, while the deposit interest rate is also difficult to reduce because there are too many commercial banks with their own problems. Just looking at debt securities of commercial banks issued by some financial institutions in the first quarter of 2020, we find that the specific problems of commercial banks makes it difficult for interest rates to fall further (Table 1).

Table 1: Issuance bonds held by banks (VND billion)

When we look at the number of investments in corporate bonds of commercial banks, we can find the attractiveness of interest rates. Therefore, it is difficult to reduce interest rates to the level of government expectations.

Meanwhile, the efforts of the State Bank of Vietnam only stop at the credit growth of the whole system at 3.26% in the first six months, lower than 7.36% during six months of 2019, and 7.82% in six months of 2018. When implementing Circular 01/2020, enterprises that basically want to reduce interest rates and debt structure will have to settle all outstanding loans of the previous contract at high interest rates, and disburse new contracts on low interest rates. The previous outstanding loans were reviewed and restructured in accordance with Circular 01/2020. Therefore, the nature of credit growth in six months should be considered in context with the current economy.

The warning about potential bad debts in the banking system has been issued by the SBV from several enterprise activities. Accordingly, when businesses turn around operating cash flow, they can pay outstanding loans first to borrow new loans at lower interest rates. Businesses in the area of tourism, hotels, restaurants, garments and footwear, will find it difficult to pay off old debts to borrow new ones at low interest rates on outstanding loans. Therefore, looking at the nature of credit growth, the average loan interest rate of businesses has not decreased much but the risk of bad debts has increased.

The above analysis shows the nature of credit growth in the system and the current situation of interest rate reduction to support the economy. With what it has, the SBV has done its best for the Government in this Covid-19 pandemic phase. However, this interest rate still cannot meet Government expectations, when the Government constantly broadcasts a policy of further lowering interest rates. So besides the SBV, what other tools the Government has must be considered.

Government bonds

If you look around the world, governments in many countries use strong policies to support their economies. In addition to the initial support policies from fiscal policy, governments of other countries have implemented more aggressively public investment budget packages, and credit packages to support interest rates for the economy.

In Vietnam, as soon as the pandemic broke out, the Government had a budget support package of up to VND 62,000 bn but the second quarter growth was only 0.36% compare to the same period. Therefore, the Government must act more aggressively to support the economy, especially to reach the goal of reducing interest rates for the economy. According to the result of government bond issuance on 8 July, winning interest rate for five year term is 1.92% per year. If this interest rate is used for lending to the economy from the refinancing package for the loan contracts of enterprises, the interest rate reduction as the Government expects would be very possible (Table 2).

Table 2: Bond issuance results on 8 July 2020 (VND billion)

If the Government wishes to reduce interest rates to boost the economy in the remaining months of the year and beyond the post Covid-19 period, they will have to determine this credit package from the budget. By issuing VND 50,000 bn of government bonds to refinance loans to the State Bank of Vietnam for loans for production and businesses in commercial banks, the interest rate will be equal to or lower than the Government bond interest rate.

The purpose of this loan is not to recover a loan interest, but to have a source of budget revenue. Although the Government accepts losses in deposit rates and lending rates, tax revenues from taxes will be maintained. This policy will even help minimize the risk of increasing bad debts for the banking system, so banks are responsible for buying and holding government bonds, instead of holding corporate bonds. Government bond interest rates are not only 1.92% at present, but also lower.

Implementing this solution does not increase the base money supply, but can be thought of as a pump that makes the lake churn. When the speed of money circulation is accelerated, it will help increase the budget revenue and the foundation. The economy will then have hopes of recovery. When majority of governments around the world work actively with parliament in economic support packages, Vietnam's problems are rarely discussed by National Assembly deputies. Therefore, businesses expect the concerned delegates in the Government to find solutions to a strong economic recovery.