Higher rates hurting economy

The Hanoi-based Southeast Asia Commercial Joint Stock Bank (SeABank) on Thursday raised deposit interest rates to 18 percent early Wednesday before reduced them to 13.5 to 14 percent.

Interest rates in Vietnam have soared over the past few weeks after the central bank signaled tighter monetary policies to curb inflation and stabilize the foreign exchange market.

While raising interest rates can help contain inflation, very high rates can hurt the economy, Tran Hoang Ngan, a member of the National Monetary and Financial Policy Advisory Council, told Thanh Nien Weekly. A deposit rate of 12 percent is reasonable, as it is higher than the anticipated full-year inflation rate of 11 percent or so, ensuring that depositors can cover the higher prices of goods.

Thanh Nien Weekly: Each time the interest rates rise, several explanations are offered, such as stronger capital inflow into the stock market, higher inflation, and tightened monetary policies. What about the latest increases?

Tran Hoang Ngan: The higher interest rates are due to increasing inflation and exchange rates. To curb inflation and stabilize the exchange rate, the central bank increased the base rate, pushing up the interest rates in the banking market.

However, the (interest rate) hike should be seen as a short term phenomenon. The central bank should consider bringing them to a reasonable level. In theory, when inflation rises, countries will increase interest rates, but the increase must stand at levels firms can accept. This is where the central bank should come in.

The latest interest rate hike has hurt local production and business, so current levels should not be allowed to continue.

Some say that the capital mobilization capacity of commercial banks is still limited, and that this has contributed to the sharp rise. Would do you agree?

High interest rates are also due to the weak management of commercial banks. They increase the cost of credit for businesses.

Under the mechanism of free interest rates, we apply a policy of negotiable interest rates, which makes banks compete against each other to lure deposits through increased deposit rates.

The banking network has extended after some rural banks turned urban in 2006. Operating on a larger scale, the banks’ expenditures have increased, so they have to raise their interest rates as well. Besides, banks looking to strengthen lending operations increase deposit rates to increase their capital supply. Thus, their lending interest rates increase as does the risk they face.

In general, local banks’ business effectiveness is still low. The prices of banking stocks, which were high several years ago, are now very low. Some banks have seen their stocks falling below their face value. This shows that the banks’ use of capital has not been efficient or effective, and that it is necessary to restructure the banking system, merging weak banks with stronger ones and dissolving those without sufficient charter capital.

In the context of the economy always needing foreign capital, how is credit supply affected?

Our savings now are lower than investment requirements, so we need foreign capital sources. However, there is a problem with this as well. From foreign direct investment (FDI) projects, we expected technology transfer and a reduction in imports. However, after 20 years (of opening the market to FDI) we receive outdated technology, and the FDI sector sees a trade deficit.

Vietnam is one of the countries with the highest interest rates in the world. This will discourage investors and encourage people to deposit money in banks. So, prolonged high interest rates will destroy small firms in the country, causing a shortage of goods, and therefore, increasing inflation again. The central bank should intervene to keep interest rates at a reasonable level.

What do you think is reasonable?

It is the correct thing to do, to accept high interest rates to curb inflation, but not at extraordinary levels. So, keeping the deposit rates at 12 percent is reasonable, ensuring that it is higher than inflation. Our country’s full-year inflation is estimated at 11 percent, so a 12-percent deposit rate can help depositors cover the higher prices they pay for goods.

Inflation in Vietnam is caused by a number of factors not decided by money supply. Some countries have an interest rate policy based on base inflation in which non-monetary factors are not calculated.

For example, prices of crude oil and food in the market are not increasing because of higher money circulation in Vietnam, but because of world supply and demand.

So it is necessary to pay attention to this issue. Interest rate adjustments should be based on the base inflation rate, not the general inflation index (or headline inflation rate that has a larger basket of goods and services).

The latter is a measure of living standards that can be used to adjust wages, but the base inflation rate should come into play in formulating interest rate policies.

Reported by Ngan Anh 

All smoke, no fire

Vietnam’s ban on smoking and its curbs on tobacco promotion are being observed comfortably in the breach

A man smokes tobacco in downtown Ho Chi Minh City. A public smoking ban that took effect almost one year ago has been ineffective, and tobacco companies are having a field day in Vietnam.

Nguyen Thanh Binh, a journalist based in Ho Chi Minh City, says with sense of irony that he is virtually unaware of any smoking ban.

“When the ban came into force a year ago, everyone kept talking about it. But since then we’ve seen no enforcement or sanction, so what’s the point of observing it?” said the 25-year-old scribe who smokes 15 cigarettes per day on average.

A Vietnamese government decree effective January 1 this year prohibits smoking indoors in public places. But little headway has been made since.

“We have to admit that enforcement and compliance are [still] poor,” said Pham Hoang Anh, Vietnam director of HealthBridge Canada, an international NGO which seeks to work with partners worldwide to improve health and health equity through research, policy and action.

“[It is] due to the weak level of sanctions, unclear enforcement mechanisms, low public awareness of the regulation and of the hazards of secondhand smoke, and high social acceptability of smoking.”

Expats are none the wiser about the ban.

“Australia banned smoking in bars while I was living in Vietnam. Moving back home and having to leave your drink with a security guard was very strange but it did inspire a kind of camaraderie amongst the smokers,” said an Aussie expat in Hanoi who declined to be named.

“Here [in Vietnam] that’s less necessary as most expats already know each other. I’ve never seen the smoking ban enforced. No one even knows there is one.”

The Global Adult Tobacco Survey 2010, the international standard for systematically monitoring adult tobacco use and tracking key tobacco control indicators, shows that currently around 15.3 million people actively smoke in Vietnam and an estimated 46.8 million are exposed to secondhand smoke.

“[These facts] provide strong evidence that the tobacco epidemic continues throughout the country,” said Jorge Alday, a spokesperson for New York-based NGO World Lung Foundation.

Smoking caused around 40,000 deaths in Vietnam in 2007, the World Health Organization (WHO) estimates. This figure could surge to 70,000 by the end of 2030 if drastic measures are not taken, the UN agency warns.

Internationally, second-hand tobacco smoke kills upward of 600,000 people every year, nearly a third of them children, according to the first-ever global assessment published last month in the British medical journal The Lancet.

Big brother

It is not just the ban that has been ineffective.

Anti-tobacco groups have criticized tobacco companies for capitalizing on legal loopholes in Vietnamese laws to launch aggressive marketing campaigns to promote the habit and the product.

Vietnam ratified in 2005 the WHO Framework Convention on Tobacco Control, an international treaty which requires countries to restrict tobacco publicity. Vietnamese laws also ban direct and indirect advertising, sponsorship and promotions, even at sales outlets.

Under the regulations, cigarette companies are not supposed to display more than one pack of a cigarette brand at any sales point. But companies and retailers have circumvented this rule by displaying different varieties of the same brand like menthol, lights or regular, anti-tobacco groups say.

They add that this strategy will lead to brands creating a variety of flavors or types so that, as in Vietnam, certain brands can dominate a large section of the display, while using just one pack of each kind.

As for indirect promotions, Alday of the World Lung Foundation says, “In Vietnam as in many other places, direct advertising has been replaced by more subtle promotional techniques such as corporate social responsibility projects. Examples include funding education or youth projects across the country or even providing disaster relief.”

Anh of HealthBridge Canada adds, “The aim of these activities is to manipulate the public’s attitude toward their reputation and send the message that they are looking out for the public’s best interest.”

Vietnam’s amended Trade Law 2005 bans all forms of sponsorship by tobacco companies. But the law stopped short of completely prohibiting sponsorship of philanthropic activities.

So far this year, British American Tobacco–Vinataba (BATVJ), a joint venture between the London-based British American Tobacco company and the Vietnam National Tobacco Corporation, has been in the news for providing five Vietnamese provinces with 22.5 million seedlings totaling VND1 billion ($51,300). BATVJ is also being investigated for cooking its books between 2006 and 2008, police in the southern province of Dong Nai, where the joint venture is based, said in October.

The Vietnam National Tobacco Corporation (Vinataba) had also, through media channels, announced pledges of VND5 billion to support poverty alleviation efforts in Bac Ai District in the south-central province of Ninh Thuan.

But the Bac Ai District government said in a recent report that they had received nothing from Vinataba and asked the state-owned tobacco giant to honor its “corporate social responsibility.”

Anti-tobacco groups have urged Vietnamese legislators to clearly define advertisement to prevent any circumventing ploys by the tobacco industry.

The government has been drafting a comprehensive tobacco control law since 2008 but the bill is set to be submitted to the National Assembly, Vietnam’s legislature, for reviewing and passing early next year.

“There are plenty of gaps that can be filled in this issue… Vietnam should follow the WHO guidelines on the protection of public health policies from commercial and other vested interests belonging to tobacco industry,” said Anh.

Vietnam plans to impose heavy environment taxes on tobacco from 2012 onwards. Currently, cigarettes are taxed at 32 percent. With a tax increase of 20 percent, retail prices would increase by about 10 percent and government tax revenues will go up by VND1.9 trillion, the WHO estimates.

“The tobacco epidemic has had severe health and economic consequences for individuals and the society,” said Nguyen Thi Xuyen, deputy minister of Health. “To protect Vietnamese from tobacco use’s related burdens, the Ministry of Health has strongly supported policies for implementing the Framework Convention on Tobacco Control.”

‘What will be, will be’

Journalist Binh said he is not afraid of any health consequences of tobacco. This gung ho attitude towards smoking impacts worries anti-tobacco groups the most. They say that as long as there is little awareness of the health dangers, smoking will remain socially acceptable.

According to the Global Adult Tobacco Survey 2010, 47.4 percent of Vietnamese men currently smoke. At a conference in HCMC last week, the Tumor Hospital filed a report pointing out that the southern economic hub records around 6,000 new cancer cases every year. So far this year, the hospital has admitted over 14,000 cancer patients compared with 13,200 last year. Lung and liver cancer accounted for the highest percentage among the male patients, the hospital report said.

But Binh said he saw no reason to worry. “What will be, will be. I have been smoking in all the places that I used to smoke.

“The ‘ban’ here is [almost] nothing. As far as I can see, changes are too subtle to be noticed.”

Reported by An Dien