Balancing Monetary Policy and Financial Market Stability
It's widely recognized that maintaining low and stable inflation serves as the bedrock upon which economic entities base their plans for savings, investments, and consumption, ultimately facilitating smooth and effective economic operation. However, even within an environment of low and stable inflation, lurking financial risks remain hidden, capable of accumulating and detonating under the right conditions.
This underscores the imperative of ensuring that monetary policy operates in a harmonious and effective alignment with policies aimed at maintaining financial stability. When we examine the intricate relationship between inflation, lending interest rates, and the economic growth of Vietnam and neighboring nations, it becomes evident that maintaining interest rates at a reasonable and steady level plays a pivotal role in fostering improved economic growth.
In contrast to monetary policy, which has a fairly concrete inflation rate target, financial stability represents a concept devoid of a straightforward measurement indicator. This complexity makes it particularly challenging for investors, businesses, individuals, and even financial institutions to gauge the objectives and commitments of governmental bodies responsible for overseeing financial stability. Furthermore, financial stability shares an intimate connection with highly speculative markets, exerting a notable influence on the sentiments of economic stakeholders, including those involved in foreign exchange, stock markets, and real estate.
Adapting Strategies to Varied Risk Levels
The coordination between monetary policy and the preservation of financial stability can be categorized into three distinct scenarios. In instances where the risk level within the financial system remains low, the State Bank (SBV) can take proactive measures by focusing on tightening monetary policy to curtail inflation. Concurrently, financial stabilization mechanisms, such as refinancing loans and emergency loan programs, can be deployed to mitigate risks within the market.
In situations marked by moderate risk, the State Bank must engage in close collaboration with governmental bodies, specifically those responsible for financial stability and the oversight of highly speculative markets. It is worth noting that, despite its capacity to provide liquidity to commercial banks, the State Bank possesses limited means to effectively intervene in the stock market and other economic spheres to forestall a potential catastrophic failure. During such times, substantial support from the state's regulatory agencies, tasked with managing these markets, becomes crucial. This support can be extended directly through state budget allocations or indirectly via investment funds, thereby working to mitigate the burgeoning risks within the financial market and speculative markets.
In cases characterized by elevated risk levels, the State Bank should engage in coordination with state regulatory agencies, prioritizing the development of crisis management solutions that foster stability within the financial system. Subsequently, appropriate tools can be employed to curb inflation. It is only when both the banking system and the broader financial system operate with stability that monetary policy can be effectively transmitted to the wider economy.
Global best practices underscore the ease with which central banks adept at managing inflation can implement solutions, especially when compared to central banks that have permitted persistent inflation to manifest, exposing themselves to risks such as domestic currency devaluation, import-driven inflation, and significant declines in foreign exchange reserves occurring concurrently. In the latter scenario, the efficacy of monetary policy is notably restricted, necessitating robust and timely intervention tools from governmental regulatory agencies to restore investor confidence within the financial market.
Managing the Interplay of Inflation, Interest Rates, and Exchange Rates
The current trajectory of inflation in Vietnam distinguishes it from other major global economies. This distinction arises primarily from the relatively modest scale of support packages, which are predominantly centered around tax reductions and relaxation measures. Additionally, the government has implemented interventions aimed at stabilizing the prices of various goods. In light of these circumstances, state regulatory agencies need not overly fret about the specter of inflation.
Instead, a more harmonious approach should be forged between inflation targets and fostering economic growth. Given the backdrop of a global economic downturn, which has significantly impacted domestic production through reduced exports and weakened domestic consumer demand, it is imperative that monetary policy leans towards supporting production, business activities, and consumption to aid in the economic recovery.
In the current milieu, relying solely on conventional monetary policy tools, such as reducing operating interest rates and open market operations, would yield only partial effectiveness in the endeavor to lower deposit and lending rates. To further the objective of reducing interest rates, state regulatory agencies must wield more potent tools, including mandatory reserves and refinancing, to inject a stable source of low-interest capital into the commercial banking system. Commercial banks, in turn, can leverage valuable securities and credit records that meet specified standards to access capital at considerably lower costs than acquiring funds from the open market. This concerted effort aims to reduce the average cost associated with capital procurement and, consequently, drive down lending interest rates.
Turning to the matter of exchange rates, a majority of factors favor the stability of the Vietnamese currency. In comparison to many major economies, Vietnam's inflation rate is not significantly higher, yet interest rates remain at a more elevated level. These two factors collectively provide a foundation for stabilizing the exchange rate in 2023. The critical aspect here lies in the orientation that state regulatory agencies provide to the market, underscoring their goals and their capacity to realize those objectives through concrete commitments and adept policy management practices.
Beyond these aforementioned factors, the USD/VND exchange rate enjoys robust support from Vietnam's international balance of payments. In addition to the surplus derived from goods exports, the resurgence of foreign direct investment capital and substantial annual remittances constitute positive forces that help maintain the exchange rate within a narrow range of fluctuation. Furthermore, inflation rates in numerous major economies have markedly cooled since the peak period of 2022. Consequently, it is conceivable that central banks in these nations may not pursue as stringent a monetary tightening as before, instead contemplating potential adjustments to avert the looming threat of economic recession.
Advancing the Role of Government Oversight
In the long run, the repercussions of economic and financial disjunction can reverberate through economic activities. Consequently, a coordinated effort is imperative among government regulatory bodies, such as the Ministry of Planning and Investment, the Ministry of Foreign Affairs, the Ministry of Finance, and the State Bank, to formulate a comprehensive policy framework that can effectively address this emerging risk.
Of particular significance is the imperative for reform within the financial market, steering it toward greater alignment with the tenets of a market-driven economy. To this end, the government will enact legal regulations aimed at facilitating financial institutions' gradual alignment with contemporary international principles and standards, with a particular emphasis on corporate governance and risk management. Financial institutions and other economic entities participating in the financial market will rely on this legal framework to inform their business decisions and take responsibility for their choices.
A recent episode, in response to divergent viewpoints from the business community regarding certain provisions of Circular No. 06/2023, exemplifies a shifting paradigm within the domain of financial banking oversight. In this instance, the State Bank of Vietnam issued Circular No. 10/2023, temporarily suspending the implementation of select provisions from Circular No. 39/2016 (introduced under Clause 2, Article 1 of Circular No. 06/2023). This development underscores the transition towards indirect regulation of commercial banks' business conduct by state regulatory agencies, primarily through the application of regulations focused on ensuring the safety of banking operations. It signifies a departure from a more interventionist approach.
Allowing financial institutions to operate with greater autonomy within a modern legal framework, while adhering to international standards and practices, does not imply a diminution of the role played by state regulatory agencies. This assertion finds validation in recent history, where US state financial and monetary management agencies displayed proactive and timely intervention when Lehman Brothers Bank faced collapse in 2008, as well as during the cases involving Silicon Valley and Signature Banks in early 2023.
These coordinated responses, orchestrated by state regulatory agencies such as the US Federal Reserve, the Federal Deposit Insurance Agency, and the US Department of Treasury, swung into action within a mere 24 hours from the moment systemic risks first surfaced. Their objectives encompassed safeguarding depositor interests, maintaining liquidity in the banking system, restoring market confidence, and showcasing a steadfast commitment to fortifying oversight and addressing infractions.
In a similar vein, the Korean Government swiftly enacted measures to stabilize the bond and currency markets when Gangwon Jungdo Development Corp., the investor behind the Legoland amusement park project, defaulted on bonds totaling up to USD 142.3 million, ultimately facing bankruptcy. The announcement of intentions to expand liquidity support programs and employ state funds to intervene served to pacify market anxieties and mitigate liquidity strain. These actions proved instrumental in preventing the ripple effects stemming from a single bank's crisis from cascading throughout the entire banking system and stock market.
