Finally, on July 11 the State Bank of Viet Nam decided to fulfill the business community’s expectations, cutting interest rates by 0.25 to 0.5 percentage points, the first such cuts since 2014.

The refinancing, rediscount and overnight electronic inter-bank rates have been reduced by 0.25. The rate for loans taken to offset shortages in clearing between the SBV and commercial banks has been cut by 0.25 percentage points, while the rate for short-term dong loans offered by credit institutions to some sectors has been adjusted down by 0.5 percentage points.

Even before the rate cuts some banks had dropped their deposit interest rates as if to prepare for a cut in lending interest rates in the near future.

For instance, in late June Dong A Joint Stock Bank reduced its deposit interest rates across the board.

On the interbank market, the overnight, one week and one month interest rates saw a steep fall of 50-80 points.

Market observers said the strong decrease in deposit interest rates by banks at this time is an unusual phenomenon.

Analysts said the main reason for this is their unusually high liquidity now.

One reason for this liquidity is that the SBV bought a considerable quantity of foreign currencies in June after its Transaction Office raised the rate of the US dollar by VND50 to VND22,725 per dollar.

A SBV spokesman revealed that Viet Nam’s foreign exchange reserves were worth US$42 billion by late June, a record level. It was double the figure in 2008.

Another reason for the rate cut is the low inflation, with prices rising by only 1.52 per cent from the same period last year. The central bank possibly felt the need to stimulate the economy or at least felt there is no danger of inflation from low rates.

Most banks admit that the cost of capital in the first half of the year deceased significantly though they refused to amplify.

They were most likely referring to the rather large spread that had developed between the loan and deposit interest rates.

The spread now stands at 2 per cent on average and up to 2.7-2.8 per cent in some cases.

In the event, some analysts said the central bank should have considered a 0.5 percentage point cut to stimulate growth.

At a recent online meeting of the Government, Minister of Finance Dinh Tien Dung said that biggest expense for businesses is their loan interest.

Because the capital market is not highly developed yet, the banking sector remains the most important supplier of funding for the economy. Not surprisingly the country’s debts are worth 110-120 per cent of GDP at VND6 million billion (US$264.4 billion).

Meanwhile, loan interest rates now are 6-9 per cent on long-term loans and 9-11 per cent on short-term loans.

The banking sector is collecting around VND200 trillion (US$8.81 billion) a year from loan interest.

This is higher than the total income tax paid by businesses estimated at VND188 trillion.

Most Vietnamese companies admit they might not be able to survive if the lending interest rates are high.

Analysts said this means that cuts in loan interest rates have a much greater influence on businesses than any cuts in income tax rates.

They are hopeful that the central bank’s interest rate cuts this time would have a significant impact on enterprises’ turnover and profit in the near future.

The decrease in their production costs would result in an increase in trading and production, consumer spending, and ultimately the economy, they said.

VN awaits deluge of foreign cars

According a report from the Ministry of Industry and Trade, demand for automobiles will likely reach  between 800,000-900,000 units by 2025 and 1.5-1.8 million by 2030.

The report said in recent years the automobile market growth has been much higher than expected though prices in Viet Nam remain very high (car prices in Viet Nam are double those in neighbouring countries like Thailand and Indonesia).

For instance, the below-nine-seat market segment has grown by 20-30 per cent a year in recent years.

The problem here is that Vietnamese automakers are not developed enough to take the advantage of this growth, and so the market is dominated by foreign cars.

Most cars sold in Viet Nam now are foreign brands produced locally through joint ventures with multinationals or fully imported.

The average use of locally made parts in the auto industry is way lower than the targets of 40 per cent for 2020 and 60 per cent for 2025.

At present the rate for cars with less than nine seats is only between 7 and 10 per cent depending on the type of the vehicles, much lower than those of between 65 and 76 per cent in regional countries.

Auto manufacturing and assembling enterprises in the country import auto parts from various sources such as ASEAN, Japan, China, South Korea, and Europe.

The imports raise the production costs due to import tax and others such as transportation.

The automotive parts industry is facing hardship partly because they have to rely mainly – to the tune of 60-70 per cent -- on imported feedstock.

For instance, some part suppliers have to import steel and iron because most of the local production is snapped up by the construction industry.

This makes locally-assembled cars cost 20 percent more than imports from neighbouring countries such as Thailand and Indonesia, especially from 2018 when tariffs on car imports into Viet Nam from ASEAN member countries will be cut to zero from the current 50 percent.

Another reason is that the size of the Vietnamese auto market is not large enough to attract foreign auto parts manufacturers. Automobile is an industry that often banks on advantages created by market size.

The size of the Vietnamese market is much smaller than those of other countries’ in the region at one-third of Thailand’s and one-fourth of Indonesia’s.

Experts from the Ministry of Industry and Trade warn that if the auto industry does not develop soon the market would see all sedans imported and 50 per cent of buses and trucks imported by 2025. 

If Viet Nam does not continue producing or assembling vehicles, this will also result in lost opportunities to develop other related sectors such as mechanical engineering, rubber, plastics, and electronics.

It would be ironic because the Vietnamese auto market is potentially very promising, whichever metric one chooses to look at: population, affluence, current car ownership ratio or infrastructure.

The country has over 90 million inhabitants, with the middle class growing and per capita income estimated to reach the threshold of nearly US$3,000 by 2020.

The auto ownership rate will only reach 50 vehicles per 1,000 inhabitants by 2025.

Road networks, including inter-city links through a network of highways, are growing strongly, creating favourable conditions for travelling by private vehicles.

With the presence of many of the world’s large auto brands, such as Toyota, Honda, Ford, GM and Mecedes-Benz, it will be unfortunate if Viet Nam does not take advantage to build its automotive industry and foster the growth of the auto parts sector.

Viet Nam has a vast network of motorbike parts suppliers, which is a basis for the development of the auto parts industry.

But analysts said to develop the industry it is necessary to have greater co-operation between the various sections of the Government.

The Government should make policies more focused and effective and related ministries should seek common ground on the issue, they said.

Often they work at cross purposes: for instance, the Ministry of Industry and Trade wants to expand the auto market while the Ministry of Transport faces pressure on infrastructure and the Ministry of Finance tends to limit the purchase of personal cars by slapping more fees.

The analysts also stressed the need for the auto industry to cope with competition after 2018, when ASEAN import tariffs are cut to zero, by reducing costs and unnecessary fees.

To do this, they suggested taking advantage of free trade agreements to increase exports of spare parts and participate in the global supply chains.

As for the Government, they said it should have proper measures such as anti-fraud provisions to ensure transparent and healthy development of the auto market.

Policies to ensure fair competition between domestically manufactured cars and imports are vital, they said. — VNS