Vietnam's surprise rate cut may spur growth amid credit worries

[HANOI] Vietnam's surprise lowering of interest rates for the first time in three years may help to support economic growth, but raises credit risks in a nation still grappling with a hangover of bad debt.

The central bank reduced the refinance rate by 25 basis points to 6.25 per cent late on Friday and also lowered the discount rate to 4.25 per cent from 4.5 per cent. The changes come into effect on Monday, the State Bank of Vietnam said on its website.

"These rate cuts will make it cheaper for businesses and individuals to borrow, so it will help spur loan demand and bolster consumption," said Do Ngoc Quynh, head of treasury at Bank for Investment & Development of Vietnam in Hanoi. "Vietnamese companies still highly rely on bank lending. We just need to be mindful about how the loans will be used to avoid increasing bad debt." The policy easing came a day after the International Monetary Fund said the central bank should remain on hold, stressing the need to contain rapid credit growth. Vietnam remains vulnerable because of the slow pace of its banking sector reforms, the IMF said.

The central bank said the move was to help boost economic growth and keep inflation under control. Vietnam is among the fastest-expanding economies in the world, but growth is still below the government's ambitious target of 6.7 per cent. Annual inflation eased to 2.54 per cent in June, the slowest pace in almost a year.

Vietnam has done much to overhaul its banking system since 2012 after a lending spree and weak controls led to a surge in bad debt. The central bank in 2013 set up the Vietnam Asset Management Company to buy banks' bad debt. Non-performing loans, at 17 per cent at the time, dropped to 2.6 per cent as of March and the government aims to keep it under 3 per cent.

"The government has spent some time stabilizing the economy and now the macro-economic situation is stable, favoring easing monetary policies for growth," Nguyen Ngoc Anh, chief economist and chairman of the Development and Policies Research Center in Hanoi.

"However, it's crucial to be more prudent with fast-lending growth and vigilant about where the money is going to avoid having bubble markets in property and equities and the quickening of inflation, which we experienced in the past," he said.

BLOOMBERG