(Bloomberg) -- Vietnam should be cautious against more monetary accommodation as it could pose risks to the economy and the banking sector, Moody’s Investors Service said.
“Given the government’s focus appears to be towards supporting headline growth, the State Bank of Vietnam may continue to pursue a neutral to accommodative policy stance,” Anushka Shah, Moody’s sovereign analyst in Singapore, said in a Jan. 26 emailed reply to questions.
“However, easier monetary policy risks undermining macroeconomic stability, particularly amid already rapid credit growth,” Shah said. “A continued acceleration in credit growth could also pose some risks to the banking sector by eroding banks’ capital buffers.”
Vietnam’s central bank will hold interest rates throughout 2018 after an unexpected cut last year, according to a Bloomberg survey, in contrast to others in Southeast Asia such as Malaysia where policy makers tightened policy last week. Officials seek to sustain Vietnam’s economic growth --- among the world’s fastest, while mindful of risks including bad loans.
Lending rose 18.2 percent in 2017 and the central bank forecasts growth of 17 percent this year. The World Bank in December also warned against rapid credit expansion in Vietnam, saying it may induce excessive risk taking and could worsen asset quality.
The central bank will “manage credit growth in a flexible and cautious manner in order to help companies and boost economic growth, while still being able to limit risks in some business areas,” Deputy Governor Nguyen Thi Hong said this month.
Vietnam’s economic growth this year may match 2017’s pace of 6.8 percent, slightly higher than the 6.7 percent target set by the government, Deputy Prime Minister Vuong Dinh Hue said in an interview this month.
Inflation quickened to 2.65 percent in January from a year earlier, Hanoi-based General Statistics Office announced Monday. The government targets curbing inflation to under 4 percent this year.
While progress is being made, corruption remains an endemic constraint for Vietnam, Shah said, and this is factored in Moody’s assessment of the overall institutional strength of the country. Moody’s, which rates the nation four steps below investment grade, has a positive outlook on Vietnam.
“Improved governance and control of corruption would contribute to preserving Vietnam’s competitiveness as a market-based economy, and help sustain foreign investor interest even in a scenario of shocks to global demand,” she said.
Ongoing reforms to attract foreign direct investment and improve competitiveness are credit positive, Shah said. Privatization of of state-owned companies will be gradual given the large size of these entities, she said.
©2018 Bloomberg L.P.