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Cup half full or empty?   2009-09-13 - VIR

A raft of local enterprises have benefited from the interest rate assistance.

 Animated debate has begun between economic experts over any decision to introduce a second interest rate subsidy package to prop up the economy, while other measures are still in place.

Has the Gov’t’s economic stimulus package accomplished its mission?

Economists are divided on a recent proposal by several National Monetary Advisory Council members that the government should implement a second stimulus package as soon as the ongoing short-term interest rate subsidy programme finishes in December.

The council’s chairman Le Duc Thuy said the second stimulus package was essential for enterprises to “avoid any shocks from a lending interest rate increase that would occur if the government does not intervene”.

The current $1 billion short-term interest rate subsidy package was introduced in February. Under the terms of the package, the government will subsidise lending interest rates at 4 per cent for eight months when enterprises borrow capital from local banks for production and business activities.

The government estimates the short-term interest rate subsidy would help enterprises access to more than VND400 trillion ($23 billion) in loans. Economists and policy-makers described the interest rate subsidy package, in conjunction with tax reductions, as an important economic stimulus measure.

They claimed the 4.5 per cent economic growth rate in this year’s second quarter from 3.1 per cent in the previous period was a direct result of the measure. Thuy said the economic slowdown had been thwarted so far. But, a second interest rate subsidy package was still needed to ensure economic stability next year.

Good news for enterprises.

State Bank statistics reveal that VND372 trillion ($20.8 billion) of subsidised loans had been disbursed up until July 2. Of which, VND347 trillion ($19.4 billion) was made up of eight-month loans and $1.2 billion were in two-year loans.

According to Vietnam’s Small- and Medium-Enterprises Association, about 70 per cent of its members have obtained subsidised loans over the past months. Thai Van Men, general director of Tan Tao Group, said the government’s interest rate subsidy package was useful to enterprises that had suffered difficulties from high lending interest rates and galloping inflation since 2008.

A recent survey conducted by the US-based Vietnam World Vest Base (WVB) Financial Intelligence Services and PetroVietnam Financial Investment and Consultancy Company found that the business community displayed more confidence in a bright economic outlook following the release of the stimulus package, especially the 4 per cent interest rate subsidy.

The survey also showed that 60 per cent of surveyed enterprises said their companies would invest more over the next 12 months, compared to 46 per cent in the first quarter.

Is the second subsidy package needed?

Speaking at a government press conference held in Hanoi last week, State Bank Monetary Policy Department director Nguyen Ngoc Bao said the government was considering a second short-term interest rate subsidy package. However, no final decision had been made.

Meanwhile, National Monetary Advisory Council chairman Le Duc Thuy said the second subsidy package was needed as a buffer for enterprises before the government ends its stimulus package. He said the second subsidy package would not cause high inflation as some had concerned because the monetary supply was relatively low due to households and enterprises tightening spending.

However, National Centre for Socio-Economic Information and Forecast director Le Dinh An said introducing a second subsidy package would be a hasty decision. “Before thinking of another interest rate subsidy package, we should review how effectively the first one is working and whether it is really essential to continue pumping money into circulation through interest rate subsidy,” said An.

Nguyen Quang A, president of the Institute for Development Study, added that the government should assess the effectiveness of the current short-term subsidy package to discover if money was being disbursed correctly. “The current subsidy should be stopped for a time to see how higher interest rates will impact on the economy,” said Quang.

“The economy is obviously in a better status and there is no reason for a second subsidy package if enterprises have not been affected by higher lending interest rates,” he said. Quang argued that high inflation would possibly return next year if the government continued to pump money into circulation through interest rate subsidy.

“I don’t think the VND400 trillion ($23 billion) disbursed through interest rate subsidy is a small amount of money. Furthermore, we don’t know how enterprises are using the subsidised loans,” he added.

Bui Quang Tuan, vice head at the Vietnam Economic Institute, warned that the ratio of toxic debts at commercial banks could increase as the government continued its short-term interest rate subsidy policy.

“Enterprises could borrow subsidised money to restructure their debts at banks instead of expanding investments,” said Tuan.

Meanwhile, An said the current stimulus package just focused on spurring enterprises’ production rather than boosting consumption. A Ministry of Planning and Investment (MPI) report shows that the ratio of inventory at industrial plants was higher than last year’s corresponding period, with a 24.6 per cent increase (please see related story on Page 1).

“The high inventory ratio means that market demand has not improved, while enterprises increase production due to low interest rate loans,” said An. An did not believe it was necessary to introduce a second stimulus package, while the government was already using other measures such as long-term interest rate subsidies, which would last until December, 2011.

The government has also announced a VND64 trillion ($3.59 billion) government bond issuance plan, which aims to raise funds for infrastructure projects to increase the country’s employment prospects.

The MPI also estimated that $3 billion of official development assistance (ODA) would also be disbursed later this year.

While the government plans to disburse all capital mobilised from the sale of government bonds, a source from the MPI’s Department of National Economic Issues said it would be a hard job because of complicated administrative procedures, site clearance issues and weak contractors. An said the government should focus on disbursing government bonds and ODA-funded projects to boost consumption demand.

“Disbursement of these projects would be more significant as it could create jobs and boost domestic consumption,” said An.



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