Navigating Monetary Policy: Vietnam’s Economic Landscape in 2024-2025
Vietnam’s economy is at a pivotal juncture in 2024, with monetary policy management taking center stage amid ongoing recovery efforts. Despite a series of external shocks and natural disasters impacting exchange rates, the State Bank of Vietnam (SBV) has implemented strategies that have led to notable improvements in credit growth. However, the outlook for 2025 reveals a complex set of challenges, particularly in exchange rates, interest rates, and the escalating issue of bad debts.
Credit Growth Surge
As of December 13, 2024, credit growth in Vietnam reached approximately 12.5% compared to the end of 2023. This increase is particularly visible in sectors critical to economic development. For instance, the manufacturing and processing sectors experienced credit growth of 10.52%, significantly up from 6.25% in 2023. The mining sector rebounded from a decline, showcasing a 12.13% growth. Other sectors, including construction, agriculture, and food services, also saw impressive growth, indicating a robust recovery.
Maintaining Low Interest Rates
In response to COVID-19 and persistent global economic challenges, the SBV has maintained policy interest rates, acting to safeguard economic stability. This strategy aims to ensure that credit institutions provide funding at lower costs, thereby stimulating economic recovery. The central bank has urged these institutions to manage operational costs effectively to further cut lending rates.
Between January and October 2024, data from the SBV revealed a steady decline in interest rates, continuing the trend from a 2.5% decrease in 2023. The average lending rate for new and outstanding loans has stabilized between 6.7% and 9% per annum. Notably, short-term lending rates for priority sectors have hovered around 3.8%, below the SBV’s maximum set rate.
The Challenge of Targeted Credit Flow
Despite the positive figures in credit expansion, experts highlight that not all lending is appropriately directed. A significant portion of credit has flowed into riskier areas, most notably real estate, while many productive sectors remain underfunded. The imbalance has heightened concerns about the sustainability of this growth, as developers and investment firms reap more benefits than end-users. Additionally, individuals remain cautious about borrowing for property amidst ongoing market volatility.
Pressures on the Banking System
The banking sector faces increasing pressure to meet capital demands, particularly regarding medium and long-term financing. This comes against a backdrop of weak capital inflow from the corporate bond and securities markets. Consequently, banks continue to compete for deposit holders, who seek better returns amidst low deposit interest rates.
Rising Bad Debts and Financial Stability
Another significant concern is the rising ratio of non-performing loans (NPLs), which stood at 4.55% of total outstanding loans as of the end of the third quarter in 2024. This figure is nearly identical to the end of 2023 and represents a notable increase from 2% in 2022. Compounding this issue is a shrinking provision buffer, with the bad debt coverage ratio falling to a five-year low, raising alarms about financial stability.
The Dilemma in Monetary Policy Management
Dr. Le Xuan Nghia, a member of the National Financial and Monetary Policy Advisory Council, emphasizes the complexities faced by Vietnam’s monetary policy management. The rising value of the USD presents a challenge as Vietnam navigates the delicate balance between maintaining the VND’s value and avoiding classification as a currency manipulator by the US. This situation complicates the central bank’s strategies for sustaining economic growth while managing inflation.
Anticipating Future Challenges
Looking ahead to 2025, experts foresee an array of ongoing challenges. Though global inflation is abating, the broader economic landscape remains unstable. Commodity prices are expected to fluctuate due to geopolitical tensions and rising food security concerns exacerbated by climate events. Domestically, Vietnam’s economy grapples with structural issues in the real estate market and lingering effects from the corporate bond crisis.
The ability of the economy to absorb credit effectively is also in question, as many businesses are downscaling operations or shuttering altogether after experiencing financial pressure during and post-COVID-19.
Limited Room for Monetary Easing
International organizations echo the sentiment that the space for further easing of monetary policy in Vietnam is limited. The SBV acknowledges the delicate balance achieved thus far in managing inflation expectations but is wary of risks that could re-emerge in 2025.
Coordination Between Policies
To meet the socio-economic targets set for 2025, the SBV advocates for cohesive coordination among monetary, fiscal, and macroeconomic strategies. This will ensure not only sustainable growth but also adequate inflation control and overall economic stability.
The SBV plans to utilize flexible monetary policy tools, closely monitoring macroeconomic trends to stabilize the money market. There are intentions to adjust interest rates and exchange rates in alignment with economic conditions and inflation metrics.
Moreover, the SBV will implement credit policies that are responsive to macroeconomic changes, channeling funds toward productive sectors while exercising tight control over lending to high-risk areas. By focusing on safe and effective credit growth, the SBV aims to enhance support for individuals and businesses alike, ensuring that economic recovery efforts are holistic and enduring.