At the Government’s regular monthly meeting held on August 5, Prime Minister Pham Minh Chinh stressed that the economic growth target for 2023 would be kept unchanged. Credit growth is seen as the driving force behind economic growth, but the slow tempo in the year’s first half is cause for concern.

In the year’s first half, the gross domestic product (GDP) growth was 3.72%. If the growth target of 6.5% for 2023 is to be attained, the GDP growth rate in the second half must be elevated to some 9%. One of the key solutions to achieve this growth rate, as concluded at the aforesaid Government meeting, is to maintain a proactive, flexible, timely and efficient monetary policy. Measures underscored to realize this policy include lowering lending rates, restructuring debt, and increasing lines of credit and money supply. Credit growth in H1 One of the driving forces behind economic growth is monetary policy, especially credit growth and money supply. In the first six months of 2023, the credit growth rate was recorded at 4.73%, which was the lowest rate for the first six-month periods since 2015, except in 2020 when the economy was battered by Covid-19 (when credit growth was 3.7%). At the start of 2023, the State Bank of Vietnam (SBV) set the credit growth target at 14% to 15%, but stressed the need for a flexible and cautious approach. In the year’s first half, the SBV managed to reduce its policy rates by between 0.5 and 2.0 percentage points, enabling banks to cut their deposit and lending rates by one to three points. Despite the rate cuts, credit growth remained stagnant, at an average of 0.8% a month, which was the lowest since 2015 except 2020 when the pandemic peaked. If this tempo is sustained, the overall credit growth for 2023 should hover around 10%, which will not only fall short of the target but also hinder the economic growth. Reasons behind credit stagnation First, the sectors that used to account for larger shares of the credit volume have fared poorly, especially real estate and renewable energy. In the real estate sector, the market in the year’s first half was almost frozen with the number of new projects or that of completed ones having fallen to new lows in as many years. Such a situation has impeded credit growth, as real estate consumed up to 21.2% of the total outstanding loans, equivalent to VND2,580 trillion, in 2022, as per data of the SBV. Such a situation was also seen in the renewable energy sector. The Power Development Plan VIII was just issued in May 2023, while the power pricing mechanism has not been available, and multiple issues in the past have not been addressed. Such inadequacies have discouraged enterprises from executing their projects. This sector, though accounting for only US$9-10 billion in outstanding credits, has expanded rapidly in recent years. A report by Fiin Group estimates the capital demand for renewable energy projects at US$13.5 billion a year towards 2030, and therefore, if impediments are removed, this sector will help spur credit growth. Export-oriented enterprises are also facing hardships due to waning demands in overseas markets, forcing them to scale down production and curbing their demand for capital. These enterprises are refraining from expansion plans due to worries about the slow recovery in major markets like the U.S., China, and the EU. Second, the slow disbursement of preferential credit packages has also dragged credit growth. Specifically, the credit package of VND120 trillion designed to support developers and buyers of social homes has barely found borrowers after three months of launching since early April, with only VND95 billion having been disbursed and VND950 billion approved, according to the Vietnam News Agency. To date, nine provinces have announced 26 budget-housing projects with a total capital demand of VND12.8 trillion, all still remaining on paper. Stringent requirements in the Law on Construction have hindered the implementation of such projects. In addition, the disbursement of public investment projects has also been moving at a snail’s pace despite a strong determination of relevant authorities. In the year’s first half, public investment disbursement reached VND216 trillion, rising 27.75% year-on-year but still trailing far behind the year’s target of VND700 trillion. Third, small and medium enterprises still find it tough to access capital. In times of economic uncertainties, SMEs are hit the hardest due to their poor financial health. They have to grapple with higher capital costs and hardships in accessing credits. It is because credit organizations have turned more prudent in appraising credit demands of clients, and as the market shrinks, it is more difficult for SMEs to prove the viability of their business plans. Even if they are eligible for funds, higher lending rates also put them in hot water. Therefore, many SMEs are shying themselves away from new business plans. Recommendations for credit growth In the second half of this year, the SBV needs to urge banks to cut costs so as to lower lending rates, making capital access easier for enterprises and the people. First, lending rates must be lowered to reduce the borrowing cost for enterprises and the people. The reduction of interest rates must not be made through administrative measures but via specific policies. The SBV has issued Circular 06/2023/TT-NHNN to amend Circular 39/2016/TT-NHNN, with effect from September 1, 2023. The new circular urges banks to lower lending rates by allowing for clients to be refinanced via credit organizations to reduce expenses. Furthermore, streamlining capital access processes – via e-lending and payday loans – is expected to stimulate the capital demand in the fourth quarter this year. However, certain amendments in the new circular may hinder investment or business cooperation, adversely affecting many enterprises, especially those in the real estate sector. Second, administrative reform needs to center on providing more specific and simpler requirements related to the disbursement of preferential credit packages, especially the above-mentioned package of VND120 trillion. Streamlining administrative procedures will entice businesses and the people to take out loans and provide banks with a more transparent mechanism to lend. Third, it is proposed the Government direct coordination among ministries and agencies to accelerate economic growth. The burden of propping up the economy should not be solely shouldered by credit providers, but require collaboration from other agencies to facilitate enterprises to execute projects and perform business procedures. The synchronous application of the above-mentioned measures will help boost credit growth in a sustained manner, contributing to the common effort to accelerate economic growth to attain the goal already approved by the Government.