VIETNAM NATIONAL UNIVERSITY - HO CHI MINH CITY

INTERNATIONAL UNIVERSITY

Financial Markets and Institutions

GROUP REPORT
THE EFFECT OF GLOBAL FINANCIAL CRISIS ON MONETARY POLICY
OF VIETNAM IN 2007 - 2013

Instructor: Ms. Vo Thi Quy

___________________________________________________________

Submitted by Group 07:

Phan Thị Thu Thảo BAFNIU20483
Võ Phương Mai BAFNIU20342
Huỳnh Kim Phước BABAIU20215
Nguyễn Thị Thuỳ Dung BAFNIU15108
I. Introduction
1. Monetary policy
Monetary policy is one of several macro policies issued by policymakers (typically central banks) and is
adjusted depending on the goals of each country. Central banks use monetary policy tools to regulate
the money supply and stabilize macro objectives.

The purposes of monetary policy:

The targets of the monetary policy adjustment target include: total reserves of intermediate banks,
short-term interest rates on the interbank market, or interest rates on treasury bills. By achieving the
target on these indicators, the Central Bank can achieve the intermediate target and therefore the final
target after a certain period of time. The criteria for selecting an activity goal are similar to that of an
intermediate goal, only that the criteria selected as an activity goal must have a strong influence on the
intermediate goals. Therefore, the choice of operating target depends on which central bank chooses as
an intermediate target: the interest rate or the total quantity of money. So, the government or central
bank determines the main objective to be achieved when implementing monetary policy, which is
usually multi-target.

In Vietnam, the goals set for many years are: Price stabilization, Economic growth, and Stabilize the
credit institution system.

1.1. Monetary policy types

Monetary policy is classified into two main directions (types):

1.1.1. Expansionary Monetary Policy

Expansionary Monetary Policy also known as loose monetary policy, the expansionary policy increases
the money supply and credit to generate economic growth. In which, state banks increase the money
supply, reducing interest rates to promote production and business, or the rate banks use when they
lend money to each other to meet any reserve requirements. The central bank can deploy an
expansionary monetary policy to reduce unemployment and boost growth during tough economic times
but increase inflation. The signal is usually the government sells compulsory bonds or bills on the open
market.

1.1.2. Contractionary monetary policy

Contractionary monetary policy reduces a country's money supply to limit rampant inflation and keep
the economy in balance. A central bank would probably raise interest rates and try to slow the growth of
money and prices by reducing the money supply, rising interest rates reduces investment in businesses,
thereby reducing inflation but making increase the unemployment rate. The signal when this policy is
applied is when the government buys bonds on the open market.

1.2. Monetary policy tools

1.2.1. Indirect tools
In Vietnam, the gorvernment and state bank often uses aggregated monetary policy in which the main
affected variable is the interest rate to aim at controlling unemployment and inflation.

1.2.1.1. Open market operations

Open market operations are the most important monetary policy tool because they are the major
determinants of changes in interest rates and the base currency, as well as the primary source of income
from fluctuations in money supply. Buying on the open market increases reserves and the monetary
base amount, thereby increasing the money supply and lowering short-term interest rates. Selling on
the open market reduces reserves and the monetary base narrows the money supply, and raises short-
term interest rates. Thus, the relationship between interest rate, and supply and demand money reserve
requirements (figure 1).

In Vietnam, through bidding, the state bank will buy/sell short-term securities (usually State Bank Bills
and Government Bonds). The purchase and sale of securities by the State Bank of Vietnam on the
market will change the monetary base. It is the main source of fluctuations in the money supply.

Interest rate

RS 1 RS2
id

if 1

if 2

RD❑

Rn 1 Rn 2 Reserves

Figure 1: The reaction of indicators when there is buying activity on the open market

1.2.1.2. Discount rate

Monetary authorities can change the interest rate at which they lend to banks, thereby adjusting the
quantity of the base currency. As the money base changes, so do the money supply. When the
rediscount rate is high, commercial banks will find that the cash reserve is too small to meet the unusual
withdrawal needs of customers. This will cause these banks to pay higher interest rates when the
discount rate is high when they have to borrow from the bank central in case of a shortage of reserves.
That will cause commercial banks to be wary and voluntarily reserve more. And it will also help reduce
the money supply in the market (figure 2)/

With this instrument, the central bank can make its loans through lines of credit available to commercial
banks. In some countries around the world such as the US, the US Federal Reserve's discount loans to
the banking system are made in three forms: primary credit, secondary credit, and time credit service. In
 Vietnam, the discount policy is implemented through various interest rates such as rediscount interest
rate, refinancing interest rate, etc.
Interest rate Interest rate

RS1
id 1
i f 1=id 1 RS 1
id 2 RS2

if 1 i f 2 =i d 2 RS2

RD❑ RD❑

Rn Rn
Reserves Reserves

(a) Without Discount Loan (b) With Discount Loan

Figure 2: The reaction of indicators when changing in discount rate

1.2.1.3. Required reserve ratio

The required reserve ratio is the amount of money that a credit institution must hold and is regulated by
the state bank. This amount cannot be used for loans or investments

A change in the reserve requirement ratio affects the money supply by changing the money multiplier.
An increase in the reserve requirement ratio reduces the amount of deposits that commercial banks can
create, which in turn narrows the money supply. On the other hand, an increase in the reserve
requirement ratio also increases the demand for reserves and the market interest rate (figurer 3). It is
therefore a very powerful tool for money supply and interest rates and is therefore rarely used by
central banks.

Interest rate

id RS1

if 2
if 1
RD 1

RD 2
Rn Reserves

Figure 3: The reaction of indicators when changing in required reserve

1.2.2. Direct tools

Refinancing instrument: is a form of credit granting by the Central Bank to commercial banks. When
granting a credit to a commercial bank, the central bank increased the money supply and created a basis
for commercial banks to create currency and clear their solvency.

Credit limit tool: is a direct administrative intervention tool of the Central Bank to control the increase
in credit volume of credit institutions. Credit limit is the maximum outstanding balance that the Central
Bank forces commercial banks to comply with when granting credit to the economy.

Exchange rate: is a tool to regulate foreign currency supply and demand. The exchange rate policy
sensitive strongly affects the production, import and export of goods, financial status, currency, balance
of international payments, investment attraction, and reserves of the country. In essence, the exchange
rate is not a tool of monetary policy because the exchange rate does not change the amount of currency
in circulation. However, in many countries, especially countries with economies in transition, exchange
rates are considered an important support tool for monetary policy.

2. The Global financial crisis and The effect on Vietnam

2.1. The Global financial crisis 2007

The 2007 financial crisis originated in the US. When the Fed's lending rate dropped to a floor of only 1%
to stimulate home buying. The housing market bubble began to burst in mid-2006, and the Fed began
raising interest rates six times. Many people defaulted because commercial and investment banks gave
loans to unscrupulous borrowers. As a result, these organizations went bankrupt. In addition, the Fed's
loose monetary policy caused inflation, but did not help the US economy recover. The US CPI reached
the highest level in history and the dollar fell miserably.

The financial crisis in the United States caused a chain reaction in a number of other countries. Because
a large amount of money poured into the US to invest comes from many other countries in the world,
especially Asia and countries with a lot of oil. This was the main cause of the second world financial crisis
cause.

2.2. The effect on Vietnam

The negative impact of the Global Financial Crisis has slowed down Vietnam's economic growth.
Vietnam's GDP fell by 7.1% to only 5.4% in 2009 (figure 4).

Inflation rate Rising hit a peak of 23.1%, which is unprecedented in history (figure 5). High inflation
makes Vietnam's consumer price index unstable and tends to increase, especially food prices (figure 6).
The massive net capital inflow put pressure on the money supply, causing inflation to rise. Indirect
investment capital poured in massively in the second half of 2007 and the first quarter of 2008 causing
the exchange rate to decrease and in order to keep the exchange rate stable, the State Bank performed
intervention transactions in the foreign exchange market. As a result, the amount of money circulating
in the economy increased rapidly leading to a high increase in the consumer price index (CPI) with a
peak of 27.7% in the third quarter of 2008 and up to 23.9% at the end of 2008. The reason comes from
import and export due to decrease in foreign currency and decrease in imported goods.
The impact of the financial crisis was widespread on international financial markets. As a result, foreign
investors and investors face more difficulties in raising capital and they tend to be more cautious in
making investment decisions when their major markets are facing some difficulties. and they were
forced to restructure in Vietnam. Thus, foreign direct investment (FDI) into Vietnam is on a downward
trend. Due to the impact of the global financial crisis, listed companies are not immune to bad impacts,
especially export businesses, one reason is that the interest rate is especially higher the lending interest
rate (figure 7).

The economic growth slowed down during two continuous quarters that had negatively impacted on the
whole economy: the fourth quarter of 2008 increased by 5.5%, and in the first quarter of 2009 the
growth was only 3.1%. Although the inflation rate was not extremely high, it then started showing signs
of escalation due to previous year’s expansionary monetary policy. The decreased prices of oil and
exported goods had led to the increase of the budget deficit.

Figure 4: %GDP GROWTH IN VIETNAM (2003 – 2009) Source: Data world bank
Figure 5: % INFLATION RATE IN VIETNAM (2003 – 2013) Source: Data world bank

Figure 6: CPI OF VIETNAM (2002 – 2012) Source: VnEconomy

 Figure 7:% LENDING INTEREST RATE IN VIETNAM (2003 – 2010) Source: Data world bank

Table 1: The proportion of imports and exports by main

trading partners of Vietnam (2000-2011) Unit: %
94

92

90

88

86

84

82

80

78
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Statistics show that, before 2007 Vietnam's exports increased steadily year by year, but after 2008
began to decrease gradually. In 2009, export turnover increased in the first two months but still not
equal to the decrease of 2008. Export turnover decreased by 13.4% during the first 7-month of 2009.
Disbursement of FDI (Foreign Direct Investment) and ODA (Official Development Assistance) capitals
also decreased compared to the same period in 2008. The applied interest rate support mechanism
(4%/year) had put significant pressure on the forex market and exchange rate.
 During the financial crisis, the Bank System had to face an extreme risk of overseas deposit and
therefore, had to conduct early withdrawals of savings and then transfer them into domestic savings.
The action had led to a chain of consequences: decreased foreign interest on debt collection,
decreased capital mobilization activities from abroad, increased capital expenditures, increased bad
debts compared to the same period of 2008.

In the condition that almost the entire Vietnamese economy fell into a state of stagnation. The State
Bank of Vietnam and the government immediately issued monetary policy to promptly stabilize the
economy, avoiding the case of an excessive recession.

II. Monetary Policy of Vietnam in 2007 – 2013 period

II.1. Background
The impacts of a global crisis spread through channels such as financial channels, international trade
channels, investment channels, and so on in an open economy, especially in emerging nations. direct
investment, remittance channel... (Akyuz, 2010), (Akyuz, 2010), (Akyuz, 2010 (Clipa and Caraganciu,
2009).

Countries can adopt stimulus initiatives to lessen the impact of the global economic crisis. The proper
audience, at the right time, and for a short period of time are all requirements for an effective stimulus
(Stone and Cox, 2008). In addition to fiscal policy, loose monetary policy is utilized to address the
recession (Schiller, 2010). According to Wieland's (2008) theoretical and empirical studies on the
impacts of monetary and fiscal policy, fiscal policy has a faster and bigger impact, particularly through
government expenditure, since it directly influences aggregate demand, but also through government
spending. The sensitivity of investment, savings, and consumption to interest rates must also be
considered when determining monetary policy.

The following are some of the methods utilized to mitigate the negative consequences of excessive
capital inflows: (i) In most markets, buying in surplus foreign currency is the answer. (Drive et al., 2005)
the economy; (ii) Adopt macroprudential policies to curb capital inflows (Pradhan et al., 2011); (iii)
Determine the actual value of money. If the currency is undervalued, the central bank must allow it to
appreciate; if the currency is under pressure to appreciate over its genuine value, the central bank must
intervene to ease the pressure while enhancing foreign reserve accumulation (Calvo et al., 1996); (iv)
Implement fiscal tightening policies to lower aggregate demand, allow interest rate reductions, and
prevent overheating; and lessen currency pressure by decreasing budget spending on non-traded
products (Calvo et al., 1996) and enacting capital controls (Pradhan et al., 2011).

II.2. In changing monetary policy period

The economic growth slowed down during two continuous quarters that had negatively impacted on the
whole economy: the fourth quarter of 2008  increased by 5.5%, and in the first quarter of 2009 the
growth was only 3.1%. Although the inflation rate was not extremely high, it then started showing signs
of escalation due to previous year’s expansionary monetary policy. The decreased prices of oil and
exported goods had led to the increase of the budget deficit. 

Export turnover decreased by 13.4% during the first 7-month of 2009. Disbursement of FDI (Foreign
Direct Investment) and ODA (Official Development Assistance) capitals also decreased compared to the
same period in 2008. The applied interest rate support mechanism (4%/year) had put significant
pressure on the forex market and exchange rate.

During the financial crisis, the Bank System had to face an extreme risk of overseas deposit and
therefore, had to conduct early withdrawals of savings and then transfer them into domestic savings.
The action had led to a chain of consequences: decreased foreign interest on debt collection, decreased
capital mobilization activities from abroad, increased capital expenditures, increased bad debts -
compared to the same period of 2008. 

II.2.1. 2008

CONTRACTIONARY MONETARY POLICY (FIRST-HALF OF THE YEAR)

During the first 6-month of 2008, due to the great pressure of escalating inflation rate on a global scale,
the average CPI of Vietnam was 15.03%, the deficit of the balance of trade reached a record level of 14%
over the total GDP. 

Consequently, The Central Bank had taken several measures to tackle the problem:
1. Contractionary Monetary Policy
The Contractionary Monetary Policy had been implemented in order to (1) limit the growth of means of
payment, as well as (2) making sure the growth of credit supply was under control. These efforts were
made to guarantee that the increase of  the Banking System’s total credit balance would not extend 30%
of the total balance. 

2. Reserve requirement ratio

According to Decision 187/QD-NHNN, issued on January 16, 2008, the reserve requirement ratio had
been applied as following: 
The required reserve ratio for demand deposits with terms of less than 12 months in Vietnam dong:
 All commercial banks and finance companies (excluding Bank for Agriculture and Rural
Development), urban joint-stock commercial banks, joint-venture banks, foreign bank branches,
finance companies are 11% of the total balance of deposits subject to the required reserve. 
 Bank for Agriculture and Rural Development is 8% of the total balance of deposits required
reserve requirements.
 Rural joint-stock commercial banks, Central People's Credit Funds and cooperative banks are 4%
of the total balance of deposits subject to compulsory reserve.

The required reserve ratio for deposits of 12 months or more in Vietnam dong:
  All commercial banks and finance companies (excluding Bank for Agriculture and Rural
Development), urban joint-stock commercial banks, joint-venture banks, foreign bank branches,
financial companies, companies finance lease is 5% of the total balance of required reserve.
 The Bank for Agriculture and Rural Development, the Rural Joint Stock Commercial Bank, the
Central People's Credit Fund, and the Cooperative Bank shall account for 4% of the total balance
of deposits subject to compulsory reserve.

The required reserve ratio for demand deposits with terms of less than 12 months in foreign
currencies: issued rate was 11% increased by 1% comparing to the previous year, applied to all state-
owned commercial banks (excluding Bank for Agriculture and Rural Development - still being applied the
rate 10%)
The required reserve ratio for deposits of 12 months or more in foreign currencies: issued rate was 5%
increased by 1% comparing to the previous year, applied to all state-owned commercial banks
(excluding Bank for Agriculture and Rural Development - still being applied the rate 4%)

Overall, the reserve requirement ratios were issued to increase by 1% compared to the previous year’s
ratios. Increased required reserve clearly means that depository institutions must hold more reserves
against the deposits on their balance sheets. Consequently, the deposits allowed to be lended would
account for a smaller percentage than before, leading to a multiple contraction in deposits and a
decrease in money supply. As a result, limited money supply and credit supply, preventing money to
transfer into the market too easily, shall be an appropriate implementation to counter high inflation
rates. 
On the other hand, required reserves applied differently to AgriBank also stated that during this period,
the Government encouraged this bank to lend deposits to firms and businesses that were involved in
operating and developing within the agriculture industry. The State Bank had made a great effort to
make sure the agriculture industry was in the best condition to grow even though the whole economy
was suffering through a tough time. Meanwhile, the government also made efforts to prevent the high-
risk lending sector, preventing large amounts of investment funds from flowing into industries that were
facing high risk of return, such as the securities industry, the real estate industry.

3. Open market operation

The State Bank had issued a large quantity of securities worth 20,300 billion VND during the first-half of
2008, implementing the tool open market obligatorily to all commercial banks. The action of selling
securities shall cause the reserve accounts of banks to decrease, greatly contributing to limit money
supply as well as strictly following the contractionary monetary policy.

EXPANSIONARY MONETARY POLICY (LAST-HALF OF THE YEAR)

In order to prevent economic recession actively in the last 6 months of 2008, the contractionary policy
had been turned into expansionary.

1. Interest rate
Basic interest rate had been decreased four times, from a peak of 14% in the middle of the year,
into a range of 7% - 8% coming to the end of 2008. 

2. Exchange rate
Vietnam has been applying the Managed floating exchange rate regime - which allows the
VND/USD exchange rate to fluctuate in a particular range under strict observation. The exchange
rate had been set in range [-2% ; +2 ] before 2008. However, it was then expanded into a larger
range of [-3% ; +3%]. From November 6, 2008, allow managers and general managers of  credit
unions to conduct forex trading, applying the issued exchange rate range.

3. Reserve requirement
During the last-half year period, the reserve requirement ratio had been readjusted under a new
decision -  Decision 2560/QD-NHNN, issued on November 3, 2008. The changes were made as
follow: 
The required reserve ratio for demand deposits with terms of less than 12 months in Vietnam dong
applied for all commercial banks, foreign bank ranches and finance companies at rate 11% on the total
balance of deposits subject to the required reserve; except for the Bank for Agriculture and Rural
Development - the reserve requirement was 8% of the total balance of deposits required to reserve..

The required reserve ratio for deposits of 12 months or more in Vietnam dong:
 Applied for all commercial banks, finance companies,...: 4% of the total balance of the deposits
required to reserve.
 Applied for the Bank for Agriculture and Rural Development, Rural Joint Stock Commercial Bank,
People’s Credit Fund: 3% of the total balance of the deposit required to reserve. 

The required reserve ratio for demand deposits with terms of less than 12 months in foreign
currencies: issued rate was 9% decreased by 2% compared to the previous 6 months, applied to all
commercial banks and finance companies (excluding Bank for Agriculture and Rural Development - being
applied the rate 8%). Looking as a whole, the reserve ratio in this sector all decreased down by 1%.

The required reserve ratio for deposits of 12 months or more in foreign currencies  issued rate was 3%,
decreased by 2% comparing to the previous 6 months, applied to all commercial banks and finance
companies (excluding Bank for Agriculture and Rural Development - being applied the rate 2%, which
also shown a decrease when comparing with the last 6-month period). 
Overall looking, the last-half 2008 appeared to apply a completely different monetary policy to the first-
half, aiming to a much different goal - to recover the economy and encourage economic growth. The
characteristics of an expansionary were definitely shown through the way State Bank implemented the
tools to control money supply: Decreased reserve requirement ratio (by 1% to all types), expanded
exchange rate range and lowered the interest rate when coming to the end of the year. This also
showed a sign of monetary policy being issued in the following year, 2009.

II.2.2. 2009
The contractionary policy applied during the first-half 2008 could lead to sharp decrease of economic
growth, or narrowing down the economic scale if continued. Entering 2009, the government had set a
goal of: Stabilize macro economics and prevent economic recession. The tools to conduct an
expansionary policy in 2009 were implemented as follow:
1. Reserve requirement ratio 
Overall, the reserve requirement ratios shown as maintaining the similar rate to those were applied
in the last-half 2008, mentioned in Decision 3158/QD-NHNN, issued on December 3, 2008. Other
saying, the rates were kept at a decreased range appropriately. The credit institutions then allowed
to keep less of the reserve, so they had the ability to lend more money to the market. Large firms
and enterprises shall be provided with larger amounts of loans to expand their business, stimulating
the economy to grow as a whole.

2. Decrease interest rate

The peak of interest rate, issued in the middle of 2008 had been reduced to 7% coming to the
beginning of 2007, and was targeted to be kept at that level during the whole year. The action of
decreasing interest rate and maintaining at a much lower rate than previous year, is the clearest sign
to show that money supply was no more intended to be limited down. 
3. Exchange rate range expanded
The exchange rate range implemented in 2008 was [-3% ; +3%], had then been changed into [-5% ;
+5%] - which means a larger range allowed it to fluctuate during 2009.  

II.2.3. 2010
Starting from 2010, the world had suffered through the crisis period and were then stepping into the
recovery age. Vietnam’s economy also went with the flow. The growth in GDP  showed an incredibly
positive sign: it leveled up from 5.32% in 2009 to 6.8% in 2010.. Therefore, figuring out the appropriate
monetary policy and the tools to be implemented rightly - is the top priority - to accommodate the goal
of stabilizing the macroeconomy, promoting economic growth and curbing inflation.

1. Interest rate
In order to control the inflation rate - which was still quite high at the time -  the Government had
increased the interest rate to 8% and decided the rate to be maintained during the whole year.  

2. Open market operation

The State Bank had conducted selling State Bank bills, net worth 294,304 billion VND, which were
obligatory for commercial banks to purchase. The purchase of these bills shall reduce commercial
banks’ reserves, as well as lowering the ability to lend loans. As a result, credit supply would be
limited down, which strictly followed the targeted contractionary policy, aiming to reach an under
control interest rate.

II.2.4. 2011 – 2012

1. Reserve requirement ratio 

The mechanism for operating reserve ratio according to Decision No. 379/QD-NHNN applied from
February 24, 2009 (for VND) and Decision 79/QD-NHNN applied from February 1, 2010 (for foreign
currencies), Circular 20/2010/TT-NHNN dated September 29, 2010.

The reserve requirement policy was based on the nature of deposit terms (short, medium, and long
term), and the type of deposit (VND and Foreign currencies). For Credit Institutions, the ratio of
outstanding loans for rural agriculture development to the average total outstanding loans at the end of
the quarters in the adjacent fiscal year was from 40% to less than 70% and over 70%: The reserve
requirement ratio for deposits in VND was 1/5 and 1/20 of the normal reserve requirement ratio for
each deposit term.

From 2009 to 2012, the reserve requirement ratio of Credit Institutions for VND deposits was fixed at 3%
and remained unchanged. The State Bank fixed the required reserve ratio for VND deposits for a long
time from 2009 to 2012 during both the high inflation in 2011 and the inflation trend in 6 months of
2012. The reserve requirement ratio tool did not play a role in adjusting the payment and lending capital
of credit institutions. Therefore, it limited the role and effect of the reserve requirement ratio in
adjusting interest rates for loans, money supply, and money creation coefficient of the Credit Institution
system.

2. Open market operations

During 2011-2012, the State Bank operated the Open Market Operations tool by the Regulations on
Open Market Operations issued together with Decision No. 01/2007/QD-NHNN and Decision
27/2008/QD-NHNN amending Decision No.01/2007/QD-NHNN.

During 2011-2012, the State Bank performed open market operations through the purchase and sale of
valuable papers for Credit Institutions. Valuable papers were allowed to be traded through open market
operations: State Bank bills, Treasury bills, and Government-guaranteed bonds,...

In 2011-2012, open market operations developed rapidly, the scale was increasingly expanded,
contributing to solving difficulties in payment and business capital for Credit Institutions, playing an
increasingly important role in affecting the total money supply (M2) in the economy, according to the
objective of monetary policy.

Through the trading of valuable papers, the State Bank directly affected the available capital of Credit
Institutions, thereby regulating the money supply and indirectly affecting the market interest rates
according to the target of reducing the deposit and lending interest rates of Credit Institutions.
In 2011, inflation was high and the State Bank implemented a tight monetary policy, so open market
tools must aim to attract money. However, Credit Institutions had difficulties in liquidity and lack of
capital to ensure the target of credit growth, so the measure of attracting money through the open
market OMO could not be implemented.

In 2012, inflation dropped rapidly below single digits, credit growth was too low compared to the target,
the open market tools must aim to pump out money to lower interest rates and stimulate credit growth,
but contrasting with the very low capital absorption capacity of enterprises, Credit Institutions with
excess money could not lend.

3. Refinancing
The State Bank used the refinancing tool to extend credit to Credit Institutions in the following forms:
secured loans for valuable papers, discounting valuable papers, and re-lending credit records to provide
short-term capital and means of payment for Credit Institutions. The State Bank of Vietnam issued a
system of complete and synchronous legal documents on policies and professional mechanisms for
refinancing by current laws, serving as the basis for the operation of the State Bank and implementation
for Credit Institutions.

In the period from January 2011 to March 2012, the refinancing interest rates ranged from 7% to 15%
per year, there were times when lending interest rates were negotiable between banks on the interbank
market from 25% to 30%/year, and commercial banks lend capital to businesses with a negotiable
interest rate of 22 to 25% per year.

4. Refinancing rate 
During the period 2011-2012, the State Bank directly decided the lending interest rates of Credit
Institutions for each customer for each term and customer (in addition to the deposit interest rate for
more than 12 months according to Circular 19/2012/TT-NHNN dated 8/6/2012 and negotiable lending
interest rate according to Circular No. 12/2010/TT-NHNN and Circular 14/2012/TT - SBV on May 4,
2012). The direct management mechanism to determine the business interest rates of Credit Institutions
neutralized the key operating interest rates of the State Bank (refinancing interest rate, rediscount
interest rate).
In the period 2011-2012, the State Bank of Vietnam had 6 times adjusted interest rates (%/year)
according to the continuous increasing trend (1/2011-2/2012): 9%, 11%, 12%, 13%, 14% , 15%; there
were 4 consecutive downward adjustments (3/2012-10/2012): 14%, 13%, 12%, 11%, 10% to achieve the
target… But because the amplitudes of each adjustment were too narrow, the adjustment trend was
rarely matched with the CPI's fluctuation trend, so the impact on money supply and money market
interest rates was very inefficient (Table 2).

Table 2: CPI and Refinancing rate of Vietnam (2011 – 2012)

5. Interest rates
From June 2011, the key interest rates of the State Bank operated according to the following
mechanism: "ceiling" was the refinancing rate, and "floor" was the discount rate, with a fluctuation
range of +/- 2% to regulate the market. The prime rate and the open market rate were set to fluctuate in
the range between the refinance rate (the ceiling) and the discount rate (the floor).

The operating interest rates of the State Bank and the deposit interest rates of Commercial Banks were
adjusted down according to the low trend of CPI (March 3, 2012 - October 2012), to ensure the principle
of positive reality, the capital mobilized in 10 months increased by +14.2%, the liquidity of the banking
system was improved with capital drawn from the economy, not from refinancing as in 2011.

From June 2011 to October 2012: The relationship between interest rates was adjusted to be more
reasonable than in the previous period, according to the principle: Rediscount interest rate < Interest
rate for deposits under 12 months < Interest rate refinancing; “floor” was the discount rate; “ceiling”
was the refinancing interest rate; with a range of 1-2%, the deposit interest rate of Credit Institutions
fluctuated within the range mentioned above.

Compared to the end of 2011, the interest rate for deposits with a term of fewer than 12 months
decreased by 6%/year (14%/year to 8%/year), and the interest rate for 4 relatively preferential loans
was reduced by 4%-5%. /year (16-17%/year down to 12%/year). Currently, lending interest rates are
popular for 4 priority fields: agriculture, export, small and medium companies, and supporting industries
at 11-12%/year; loans for other production and business sectors at the rate of 14-17%/year. In
particular, interbank interest rates fell sharply by 8-9% per year compared to the beginning of 2012, the
money market had a much more improvement compared to 2011.
The negotiable interest rate mechanism was implemented by Circular 19/2012/TT-NHNN dated June 8,
2012: “The interest rate for deposits with a term of 12 months or more was set by Credit Institutions
based on market capital supply and demand”.

Negotiable lending interest rates were implemented since April 14, 2010, according to Circular No.
12/2010/TT-NHNN and Circular 14/2012/TT-NHNN from May 4, 2012, for loans outside 4 priority areas
Credit Institutions lend at agreed interest rates.

Table 3: CPI and Interest rates of Vietnam (2011 – 2012)

6. Credit limit
In 2011, the State Bank set a general credit growth target for the entire system of Credit Institutions,
without allocating limits to each Credit Institution.

In 2012, the State Bank decided to allocate credit lines to each commercial bank according to the
following criteria: quality of assets, liabilities, assets; the size of capital, management capacity; risk
management; and quality of human resources. Accordingly, the groups classified by the State Bank were
entitled to the following limits: A maximum credit growth rate for the first group 17%; the second group
15%; the third group 8%.

By June 2012, the total credit balance of the whole banking system increased by 1.51% compared to the
end of 2011 (2012 plan is 12%), of which 69 credit institutions had negative growth. 
In the whole year of 2011, credit balance grew by 14%/year, equal to 70% of the set target (20%) and
down by -56% compared to 2010's growth rate (31.19%).
From March 2011 to July 2012, CPI continuously decreased to negative levels by months(0.16;0.05;0.18;-
0.26;-0.29 ), CPI in 2012 increased very low, an estimated 7.0%. Total outstanding loans to the economy
in 2012 were estimated to increase by +5.5%, reaching more than 30% of the target (+15% - 17%/year)
and only equal to 39% of credit growth in 2011.

7. Exchange rate
The State Bank of Vietnam has adjusted the exchange rate very strongly, educe the value of VND against
USD by 9.3% and reduce the amplitude of impulse fluctuations to ±1%, and at the same time use a low
ceiling interest rate for foreign currencies to increase the difference between foreign currency and VND
interest rates (with ceiling at that time was 14%/year). This move caused the market rate to skyrocket
to 22,100 (VND/USD) immediately, but after a short while, it became stable. The new policy of the State
Bank has been effective because businesses and individuals have begun to convert foreign currencies
into VND to take advantage of the high interest rate difference, so the market exchange rate and the
listed rate at commercial banks all decreased in April 2011. The USD price gap between commercial
banks and the free market has narrowed significantly, from the highest level of about 2,000 VND to only
30–40 VND today (October 10, 2013).

Table 4: Exchange rate of VND/USD (2006 -2013) Source: Trading economic

II.2.5. 2013
1. Reserve requirement ratio
In the period from 2012 to 2013, in the condition that the money and foreign exchange markets were
relatively stable, inflation was controlled, and the monetary policy management needed to be flexibly
implemented many targets, so the State Bank maintained a stable rate of inflation in VND and the
reserve ratio was quite low compared to other countries with similar conditions to create good
conditions for reducing interest rates according to the orientation, stabilizing liquidity and banking
activities, especially during the implementation process of current restructuring.

2. Open market operations

From 2012 to 2013, the open market promoted its role as an important tool to help the State Bank
regulate the currency, orient the interbank interest rates, and closely coordinate with other monetary
policy tools to achieve the objectives of monetary policy.

In the condition that the VND liquidity of credit institutions improved and there was a surplus, interest
rates on the interbank market decreased compared to the previous period, the State Bank flexibly
operated OMOs in both buying and selling directions of valuable papers daily to contribute to stabilizing
the money market, controlling inflation, and supporting exchange rate stability. 

3. Refinancing
Since the beginning of 2012, implementing the Government's resolutions on prioritizing inflation
control, stabilizing the macro-economy, ensuring social security, ensuring the liquidity of Credit
Institutions and the safety of the banking system, restructuring the system of credit institutions, the
State Bank reduced refinancing sales, focusing on meeting the liquidity needs of Credit Institutions.
In 2013, due to relatively abundant liquidity, Credit Institutions had almost no need for refinancing
loans, and some commercial banks had outstanding refinancing loans that had already been repaid
early.

4. Interest rates
Since 2012, in the condition that inflation is well controlled and maintained at a low level (below 4%),
this created conditions for the State Bank to gradually reduce operating interest rates, refinancing, and
rediscount interest rates, with appropriate levels for each period (9 times of downward adjustment of
operating interest rates with a total reduction of 8.5%/year in two years 2012-2013 ). Since 2013, the
State Bank of Vietnam kept the operating interest rates stable due to low inflation and stable interest
rates over the years.

5. Exchange rate
In the period 2012-2013, the State Bank continued to operate under the managed floating exchange
rate mechanism and announced the average interbank exchange rate between VND and USD every day.
But since 2012, the State Bank proactively announced the annual exchange rate adjustment orientation
(from 1-3%) to enhance transparency, market orientation, and create conditions for businesses to
actively build their business plans. In parallel with flexibly adjusting the exchange rate, the State Bank
implemented measures to buy and sell foreign currencies to intervene in the market when combining
exchange rate management with monetary policy tools to reduce pressure on the exchange rate and
foreign currency market, maintaining the difference between VND and USD interest rates to encourage
businesses and people to hold VND. Narrowing foreign currency position from +/-30% to +/-20%. 

III. The result of changing monetary policy period

It can be seen that, in the past two years, the State Bank has made great efforts in monetary
management and regulation by operating monetary policy tools in a flexible, closely coordinated and
rhythmic manner. with foreign exchange management, step by step remove the bottlenecks of the
market, ensuring the stability of the money market. Vietnam's economy in general has recovered,
inflation has been contained and tends to decrease gradually. 
 Table 4: Inflation rate of Vietnam (2007 -2014) Source: Macro trends

 
During the period 2007 - 2014, 2008 had the highest inflation rate in the period 2007-2014 and 2011 had
the second highest inflation rate. The State Bank of Vietnam actively and flexibly operated monetary
policy tools to control and bring inflation from a high of 23% in August 2011 to 6.81% in 2012, 6.04% in
2013, and 1.84% in 2014.

In the period 2011 - 2014, thanks to the application of tight monetary policies, while promoting
production, increasing exports and controlling trade deficit, inflation tended to decrease in 2014. The
period 2011-2014 marked the period of keeping inflation stable at the lowest level. Inflation is stable at
a low level, macroeconomic stability is maintained, foreign exchange market, exchange rate is stable,
foreign exchange reserves have increased to a record level, banking system liquidity has been steadily
improved. basic factors used by international credit rating agencies as a basis to raise Vietnam's credit
rating.
 Table 5: %GDP growth of Vietnam (2007 -2014) Source: Data world bank

In the period 2002 - 2007, Vietnam was always considered as a bright spot in the global economic map
with an average growth rate of 7.8%. With the work of joining the World Trade Organization (WTO) in
2007, the GDP growth rate reached nearly 8.5%.

Since the implementation of the global economy broke out in 2008, Vietnam has been immersed in a
slow growth spiral when major export markets were affected, and domestic purchasing power
decreased. During this period, GDP has always increased by less than 7% and has been decreasing, by
2012 it was only 5.03%, less than two-thirds of the level before the crisis.

The monetary insurance policy from October 2008 to October 2010 along with the policy support
interest rate in the economic activation package in 2009 contributed to bringing Vietnam's economy
into the recovery cycle in 2010 and 2011 with decent export, real estate market up, stock market
recovery. In general, the main budget statistics from October 2008 and policy support on interest rates
in the 2009 activation package of the government will work to the economy when investment recovery,
GDP growth in 2010, 2011 turns out to be 6.42% and 6.24% respectively. (higher than 5.66% and 5.4% in
2008 and 2009).
 Table 6: %GDP growth of Vietnam (2014 -2020) Source: Data world bank

After 2014, Vietnam's economy showed signs of recovery. Vietnam's GDP growth rate in 2014 reached
6%, and in 2019 it increased to 7% - the highest in the last 10 years. By 2020, Vietnam's GDP has once
again dropped to near bottom because of the covid 19 pandemic.

Table 7: %Unemployment rate of Vietnam (2008 -2013) Source: Macro trends

2008 and 2009 were two years when Vietnam had a high unemployment rate due to the economic
crisis, many businesses went bankrupt, leading to layoffs.

Regarding unemployment, with the Government's job creation policies, plus the stable economy after a
gradual recession, the unemployment rate has been decreasing and stabilizing. close to the natural
unemployment rate.

Research results in the period from 2008 show that, as the economy moves further away from 2008 -
the peak year of the economic crisis, unemployment will tend to decrease and stabilize, tend to
gradually approach the natural unemployment rate, especially in 2008 and 2011 when inflation spiked
sharply.

Table 7: Exchange rate USD/VND (2008 -2013) Source: Trading economics

However, the economic stimulus policy through monetary easing and interest rate support still has
some limitations. The Government's stimulus policy through the short- and medium-term interest rate
support loan package in 2009 tended to flow into speculative channels along with a high degree of
loosening monetary policy, which brought the The economy came to a new period of macroeconomic
instability when credit grew above 30%, causing inflation to start to rise at double digits in 2010, 2011,
VND depreciated significantly against USD. The expansionary monetary policy along with the policy of
interest rate support in the economic stimulus package of the Government has achieved the goal of
promoting economic growth, but the goal of stabilizing the macro-economy and controlling inflation has
not been yet controlled fully. Therefore, it is necessary to study and develop indicators of interest rate
growth, money supply, and credit at reasonable levels in the medium and long term as a basis for more
flexible monetary policy management. 
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