The SBV now expects the banking sector to achieve this year's credit growth target of 12 per cent. — VNA/VNS Photo Danh Lam

According to the State Bank of Viet Nam, banks' credit grew by 2.93 per cent between August 21 and September 30, meaning around VND61.66 trillion (US$2.90 billion) was pumped into the economy.

The spurt has helped take credit growth for the year to 7.26 per cent.

In Ha Noi, at the end of September total outstanding loans at banks were estimated at VND980 trillion ($46.23 billion), or a 3.7 per cent rise for this year. HCM City's outstanding loans increased by 6.05 per cent to VND1,010 trillion ($48.10 billion).

The SBV now expects the banking sector to achieve this year's credit growth target of 12 per cent.

Which industries have absorbed credit most? The answer is not so straightforward. The bosses of some banks revealed that many lenders injected large amounts of money into giant corporations, irrespective of industry.

SeaBank for instance lent $61 million to Vietnam Airlines to buy a new aircraft, while TPBank lent VietjetAir VND700 billion ($32.45 million).

Vietcombank plans to lend for the construction of a road linking Tho Xuan Airport in Thanh Hoa Province with the Nghi Son Economic Zone. VietinBank lent VND700 billion for setting up infrastructure at the Trang Due-Hai Duong Industrial Park.

According to the central bank, in the first 10 months growth in credit to the hi-tech sector and housing stood at 15.78 per cent and 11.5 per cent, higher than other sectors.

Some others like securities and retail are also said to have accounted for higher credit growth than the overall average of 7.26 per cent.

Analysts said there are many reasons for the sharp credit increase at this time besides seasonal factors.

In September and October the central bank announced several policies that make it easier for individuals and businesses to borrow.

For instance, more categories of people are allowed to borrow from the VND30 trillion ($1.43 billion) home loan package to buy low-cost housing.

The Government has also allowed individuals and households in agriculture and rural areas to borrow without collateral.

The increasing co-operation between local people's committees and banks for providing credit to businesses is also an important factor in the credit growth.

But the analysts expressed some apprehensions about the recent spurt in lending, the main fear being if the money has been flowing into the right sectors to benefit the economy?

The strong lending growth has had an impact on banks' liquidity as shown by the fact that interest rates have edged up on the inter-bank market and government bond market.

In the last three weeks the overnight interest rate has sometimes risen from the average1.5 per cent to as high as 3.5 per cent.

Major investors

So far this year bonds issued by the Government and guaranteed by it have together been worth VND198 billion ($9.32 million). Treasury bonds have accounted for VND183 billion ($8.71 million).

Banks remain the major investors in the bond market. According to the Viet Nam Bond Market Association (VBMA), bonds account for seven per cent of banks' total assets.

Analysts expect the bond market to remain strong since banking credit growth is still low as aggregate demand as well as businesses' capacity to absorb capital do not look like improving any time soon.

Besides, though the banking sector has seen some positive changes following its restructuring, progress remains slow. Because of this, banks have no choice but to continue investing in government bonds that are a safe investment and provide reasonable returns.

Critics say that the heavy bond buying by banks will affect their ability to lend and thus economic recovery.

But others dismiss these fears, saying banks always have to earmark enough funds to meet corporate credit demand.

Eastspring Investments says this demand is not very high yet.

The Government's determination to pursue economic restructuring also fosters the development of the bond market.

Besides, market players have been making many proposals to the Ministry of Finance and the State Securities Commission for developing the market.

Trade deficit is back

In the last two months Viet Nam's trade deficit has made a comeback after the dong gained against major currencies like the euro and yen. The rising imports of luxury goods, especially cars, has not helped.

Viet Nam achieved an impressive export performance in the first eight months to report a $1.7 billion trade surplus, equivalent to 1.8 per cent of exports. But in September and October there were deficits of $600 million and $400 million.

The dollar has appreciated in recent months, and since the dong is pegged to the greenback, it has gained too. The dong appreciated by 3.1 per cent in September and 4.5 per cent in October against the euro and yen.

A stronger dong has impacted the competitiveness of Vietnamese goods.

Besides, the imports of key items like machinery and equipment, electronic components, plastics, steel, fabric, and footwear accessories have shot up.

Though normally this spurs exports, it did not happen this time. For instance, imports of phones, electronics, computers, and components rose by $600 million in September but their exports rose by merely $200 million to $3 billion.

The increase in the import of luxury items is particularly noticeable. Automobile imports, for instance, rose by 48 per cent in the first 10 months to $2.8 billion.

Since the economy is recovering gradually and import tariffs are falling under the ASEAN Free Trade Agreement, the demand for imported cars is on the rise.

This is expected to continue since the tariffs on complete-built units of automobiles from ASEAN member countries will be cut to zero by 2018. — VNS