Tough times to persist for banking sector
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The banking sector remains a concern in 2011, with rising interest rates, pressure on the exchange rate, and liquidity all worrying people.
The lending interest rate is partially a function of a bank’s efficiency and competitiveness since if it manages to cut costs, it can lend at lower rates but still remain profitable.
While Vietnam's banks have managed to bring interest rates down considerably from past years, they are not very competitive yet and tend to pass on costs to customers by demanding unusual fees such as for arranging the loan.
The trade deficit was around $12 billion last year and is forecast to edge up to $13 billion to $14 billion in 2011.
Though it is just 20 percent of exports, the deficit still puts significant pressure on the demand for foreign exchange since foreign exchange reserves are modest and inflows not forecast to increase by much.
In this context, pressure to devalue the dong will become inevitable if the government does not have long-term solutions.
Preventing the use of dollars in the economy, reducing import of nonessential goods, and increasing exports will be the solutions to stabilize the foreign exchange market and exchange rates.
In the long term, the government should focus on economic growth quality and not pursue just high growth rates.
Liquidity concerns
Recent experience shows that stabilizing the banking sector remains a concern, especially liquidity.
Banks’ frequent lack of liquidity reveals unsatisfactory liquidity-risk management and the imbalance between availability and use of resources.
Though the financial strength of banks, as reflected by their capital, has improved significantly, the dramatic rise in bad debts has been a blow to their financial capacity.
Ratings agency Moody lowered the credit ratings for foreign currency deposits for six Vietnamese banks from B1 to B2 last month while Fitch Rating and S&P also lowered credit ratings for six other banks.
The sudden rise in deposit interest rates at mid-sized banks to 18 percent last month shows that liquidity and risk-management problems need close attention.
Warning officials can help lower the rates but tackling the causes in 2011 is an important task for management agencies.
Restructuring the banking sector also needs attention this year and in the future.
The structural issues include increasing lending to the private sector, for manufacturing, and in rural areas; addressing the imbalance in lending by increasing medium- and long-term loans to more appropriate levels – but reducing average loan size --and reducing short-term lending.
Loans of up to one year account for 80 percent of lending now.
