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Prospects dim for lower interest rates   2011-08-23 - VNS

There have been signs in recent days that interest rates are easing a bit with decreases of between 1 and 2 per cent in deposit interest rates and 0.1 and 0.3 per cent in lending rates.

However, opinion is divided on whether the central bank's target of lowering lending interest rates to 17 or 19 per cent per year in the next five months would be realised.

With current interest rates standing at 21, 22 or even 23 per cent, the banks have to cut their lending interest rates by 4 or 5 per cent to realise the target.

Central Bank Governor Nguyen Van Binh has observed that there are sufficient conditions for interest rates to drop. The liquidity situation at banks is stable and credit growth has been poor in July, he notes.

A banker in HCM City agrees, saying his bank has reduced its lending rate to 19.5 per cent per annum but disbursement is still slow. Yet another banker says the total amount of outstanding loans at his bank has been falling of late.

He says enterprises are struggling with economic difficulties and thus refraining from taking out new loans, and loans for the non-production sector are limited anyway.

"We may negotiate and lower interest rates to meet our clients' needs," he says.

The inter-bank rate has been stable at 15 and 16 per cent. Since July, several banks have kicked off promotion programmes to relieve interest rate burdens for their clients, which has made preferential lending rates of some banks stand at around 21 per cent per year.

The Asia Commercial Bank (ACB) has also launched a special credit programme for individuals and households in need of capital, reducing interest rates by 1.2 points per year for both short-term loans or loans of VND500 million (US$24,000) or more.

Some other banks that have seen slow credit growth, like Sacombank, OCB and DongA, have also announced plans to adjust their interest rates to push up lending.

While the Government is looking to curb credit as a major part of its anti-inflation strategy, several experts are now saying current credit policies are too tight. They say many enterprises are struggling to survive, and it is time to loosen the policies and save them from closure.

However, the fact is that there has still been no sharp decline in interest rates because deposit rates remain high.

At medium-sized banks, interest rates on deposits of less than VND100 million stand at around 14 per cent, while those over VND100 million ($4,784) fetch between 16 and 16.5 per cent. The rate of 17 per cent is still applied to deposits of VND300 million ($14,350) or more.

Dam The Thai, deputy general director of HD Bank, says banks are finding it difficult to balance their deposit and loan rates, although they have ample funds for lending. Banks that still maintain a high deposit rate to retain its customers find it most difficult to lower their lending rate, he says.

Some economists says the pressure of high inflation in the past months has prevented banks from lowering their lending rates, despite their efforts to do so.

Meanwhile, many banking officials believe deposit and lending interest rates would come down only when the central bank loosens the current monetary policies in force by increasing money supply via the open market and lowering inter-bank interest rates from the current 14 and 15 per cent to 12 per cent.

The banking sector's credit growth has been brought down to as low as nearly 8 per cent because of the tightened policies, they say. Therefore, the central bank can bravely pump more money into the open market so that lending can increase by 5 per cent and deposit interest rates are kept at 14 per cent, they say.

No fuel price cuts

The Ministry of Finance has announced that there will be no fuel price adjustments expected by consumers because the base prices of imported fuel is still higher than retail prices.

In a statement released to the press recently, the ministry said that the base price for A92 petrol was VND 21,758 per litre, or VND458 higher than its retail price; while that of diesel 0.05S is VND21,442 per litre, or VND342 higher.

The base price is calculated by adding to the average import price over a period of 30 days such factors as import tax, traffic fees and petrol price stabilisation fund contributions and other expenses.

The ministries of Finance, Industry and Trade, Planning and Investment ministries also felt the import tax rate on fuel was currently low (0-5 per cent), hence no fuel price adjustment was warranted.

A report by the Ministries of Finance and Industry and Trade also said petroleum enterprises were suffering losses of VND458 and VND342 per litre of petrol and diesel, respectively.

However, many independent market analysts have expressed dissatisfaction with the ministries' explanations.

They say they still have doubts about losses being made by petroleum traders because their input costs are not transparent for various reasons.

At present, business costs fixed by the finance ministry for petroleum companies is VND600 per litre while the latter have to pay only VND150 for freight and insurance costs.

Another reason is that while many petroleum companies say they are suffering losses, they still increase discounts for retailers by VND200 to 300 to VND700 and 800 per litre.

The analysts also say that the rationale of low import taxes and the need to maintain State budget revenues for not lowering fuel prices cannot be accepted.

They say State budget revenues will not decrease even when fuel import taxes are brought down to zero.

From last December until now, the finance ministry has cut petroleum import tax three times from 17 per cent for petrol items to zero, and from 10 per cent for diesel oil to 5 per cent.

But during this period, crude oil has also sold at higher rates, bringing in VND57.1 trillion to the State budget, a year-on-year increase of VND23.8 trillion ($1.1 billion).

This means that the State budget does not suffer if all the petroleum import tariffs were cut to low levels.

In addition, the analysts say, there are still other revenue sources for the State budget, including special consumption taxes, value-added tax and so on.

Moreover, petroleum products are not ordinary goods but essential items. Their prices, therefore, have direct influences on people's live and almost all of the country's industries and branches, experts say.

So, they suggest that the ministries reduce prices of the diesel first. The price of this oil will have an immediate effect on transport expenditures and production costs of many industrial products.

To overcome a shortage of capital due to high interest rates, local apparel enterprises are looking to establish co-operative ties with both domestic and foreign partners.

In May, the Phuoc Long Investment Joint Stock Company (PLI) signed an agreement with Japan-based Sumikin Bussan to start construction of the Phuoc Long – Sumikin Bussan factory with a total investment of VND23 billion ($1.1 million) in HCM City's District 9.

Sumikin Busssan's strengths are in steel, heavy industry machinery and equipment and garments. The Japanese company already has a global network of clients.

PLI general director Ho Thi Thu Ha says the new factory will specialise in producing upmarket products that carry famous trade names like Blue Label, Burrerry Gold, Burberry London, DKNY and Cecio BIS.

These products will be exported to the US and Japan.

To facilitate its exports to the US, the Phong Phu Textile and Garment Joint Venture Company in March negotiated a deal with its strategic partner, US-based ITG, to set up a $80 million joint venture for building a cluster of textile and garment factories in the Hoa Khanh Industrial Park in Da Nang.

Later, the company also co-operated with the ITG to develop a $100 million project specialising in the production of cotton fabric.

Meanwhile, the Viet Nam National Textile and Garment Group (Vinatex) and the Viet Nam National Oil and Gas Group has begun operating the $324.85 million Dinh Vu Polyester Fibre Plant in Hai Phong City. It has a production capacity of 500 tonnes per day.

They have also started construction of the Phu Bai Fibre Plant with a total investment of VND140 billion ($6.7 million).

Vu Duc Giang, chairman of Vinatex, says that the corporation plans to call for both foreign and domestic companies to co-operate with it to invest in areas like weaving and dyeing, and also in setting up supporting industries.

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