Vietnam’s Credit Growth Limits vs Targets: There’s a Difference. It Matters.
There has been some misreporting that Vietnam is looking to get rid of credit growth targets. In actual fact, it’s talking about getting rid of credit growth limits. These are different things and this is an important distinction to make. Here’s why.
For the past year and a half or so, there has been broad discussion about removing Vietnam’s credit growth limits.
Earlier this month, it was reported that this was drawing closer to becoming a reality with the Prime Minister of Vietnam, Pham Minh Chinh, telling the State Bank of Vietnam (SBV) to remove the credit growth limits from next year.
It was, however, reported by some news outlets that it was credit growth targets the Prime Minister was actually talking about.
This then led to speculation that the Government of Vietnam might be signalling a shift to a more independent SBV, which currently has very little independence, if any at all.
This is problematic in that it’s not really the reality.
Credit growth limits and credit growth targets are two different things that actually function in opposite ways to each other, and this is an important distinction to make.
Credit growth limits are a cap that restricts lending beyond a certain threshold. They are generally applied to keep inflation under control by managing the flow of currency into the economy.
Conversely, credit growth targets are designed to push more money into the economy by motivating banks to lend more.
The latter is unique to Vietnam; however, the former, while not ideal, is a policy lever commonly engaged in developing economies.
Indeed, credit growth targets have been known to be effective at curbing out-of-control inflation.
Developing economies like Egypt, South Africa, and Bangladesh, as well as developed economies like France, Portugal, and Italy, have all used credit growth limits at one point or another.
Vietnam’s own 30 percent credit growth limit in 2008 helped to ease out-of-control inflation that peaked in August of that year at 28.32 percent, falling to just 1.97 percent a year later.
Credit growth limits, however, are only supposed to be a stopgap measure.
Generally, central banks rely on interest rate moves to manage the flow of capital into the economy, lifting interest rates to slow it down and lowering interest rates to speed it up.
When this happens, however, whichever direction it goes, it sends signals to the market, which responds accordingly. When interest rates go up, consumer spending slows and investors pull back; when interest rates go down, spending increases and investors push forward.
In the case of Vietnam, the policy goal right now is to maximise GDP growth but keep inflation low.
These aims, therefore, are contradictory with a cut likely to push up inflation as investment and spending increase, but an increase likely to slow GDP growth.
In this context, credit growth targets look to be a workaround, a much subtler and more controllable means of boosting economic growth. That’s not to say they don’t have the same inflationary effects.
But, of course, targets are not enforceable — the government cannot make a bank lend money.
However, it is well known that a private business’s alignment with government objectives can pay political dividends, or put another way, failing to align with government objectives can have the opposite effect.
That doesn’t negate the fact that these targets have the potential to be hugely problematic.
By pressuring banks to lend more, it encourages risk-taking which in turn leads to more bad debt.
This is already visible — a Tien Phong calculation put non-performing loans up 12 percent year-on-year as of the end of June.
And this may only be a drop in the bucket.
Bad debts in Vietnam are not sold off to private collection agencies but rather transferred to the Vietnam Asset Management Company (VAMC). The VAMC then allows banks to spread recognition of the loss over five years, so, in reality, a bank’s bad debt exposure may actually be much higher than what’s on their books at any one time.
All of that is to say that there seems to be some important nuance that is being missed, along with some context that really needs to be considered, to properly understand what is actually being talked about with respect to credit growth policy and what impacts any changes might have.
To be clear, there is no word on doing away with credit growth targets; in fact, if anything, it’s looking increasing like they may be given a permanent and more prominent role in economic policy setting.
It does, however, seem that credit growth limits may have their days numbered, although there is little evidence to suggest that this is necessarily a good thing, particularly considering it is one of the few inflation circuit-breakers the SBV has used successfully in the past.
