I. INTRODUCTION During 2007 2011, Vietnams interest rate has fluctuated greatly.

. In 2007, interest rates were stable at 8.25%, 6.5%, 4.5%, 11.4% for basic interest rate, refinancing rate, discount rate, and short-term lending rate respectively; then it surged to its highest at 14%, 15%, 13%, 21% at the end of the second quarter of 2008. Then suddenly its started to drop as low as 7%, 7%, 5%, 6.3% by July 2009 and then from there it rebounded has continued to increase, reaching a 9%, 13%, 15%, 20% as of today (comparable to its highest in 2008). This fluctuation is demonstrated in the graph below:
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Lending rate VND STL Lending rate VND MLTL SBV basic interest rate SBV refinancing rate SBV discount rate

This paper summaries the trend of interest rate for each year from 2007 to 2011 as well as attempts to explain why interest rate has fluctuated in such manner for each period. In addition, this paper also attempts to identify two important causes that contributed to the fluctuation of interest rate during this period. The first cause which started the fluctuation in interest rate is the sudden surge in FDI starting from the end of 2006 to the end of 2008. The second cause which create fluctuation after fluctuation of interest rate is the stop-go and inconsistence macro policy of Vietnam government.

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1. The start of the ride - the WTO, APEC after effects: The graph of Vietnams interest rate from 2007-2011 raise the question Why did interest rates fluctuate so much during 2007 2011? From 2001 2006, interest rate was still relatively stable and 2007 was the final calm before the ride. However, in reality, trouble is already brewing in 2007 while everybody was busy enjoying the so-called hey days of Vietnam economy after joining WTO and APEC in 2006. Combining with PR efforts from the government as well as the relentless work of the media, Vietnams success story in joining WTO and its success in hosting the 18th APEC in 2006 has boosted overall confidence level within the country and the confidence level of many foreign investors. As a result, FDI started to soar in late 2006 to the end of 2008. 2006 FDI was USD10billions, then in 2007, this figure surged to a record level at USD20billions (100% growth rate), but again the record was broken in 2008 with registered FDI at USD64billions & actual FDI disbursement at VND11.5billions (an increase of 222% and 43.7% respectively compared to 2007). Thanks to this, Vietnam GDP growth rate in 2007 reach 8.5%, and it was declared to be the 6 th most attractive country for FDI by the UN. The graph below show the sudden increase in Vietnam FDI during 2006-208: Nevertheless, the rosy story didnt last long as everything have a price. The infusion of US dollars into the economy through FDI during 2007 and 2008 was among the main reasons that accelerate inflation. In order to absorb this huge amount of foreign currency from foreign investors, the inexperienced government decided to sell all the VND they could print to foreign investors which ultimately create a sudden surge in money supply of VND. Too much money at once without much change in total production output lead to inflation. This coupled with the Tet effects and commodity price hike at the start of 2008 drove inflation go wild. By February 2008, Government started to tightened monetary policy which initiated the start of a chaotic interest rate period which continue til May-2011. 2. Stop-go and inconsistent monetary and fiscal policies: - Even though joining WTO has further integrated Vietnam economy to the global economy, the fact remains that Vietnam economy still hasnt integrated that much with the global economy. This in essence makes it easy for Vietnam policy makers to apply monetary and fiscal policy to correct the economy. Nevertheless since it is easy, government eventually abuses these tools. To further clarify this point, imagine a doctor who tries to cure his patient as fast as possible by abusing the use of injection instead of administering pills. As the patient has a fever, our doctor gives him an injection that helps to immediately reduce the fever. But then the injection create a side effect that eventually make the patient feel weak, so our doctor decide to give him another injection to re-vigor his energy. But again with his eagerness to quickly heal his patient, our doctor overdose on the previous energy injection which makes the patient having a fever again. This analogy is what happened to Vietnam economy during 2007 -2011. The patient is the economy itself, our good-will eager doctor is the policy makers or Vietnam government, and the injections are macro policies. In order to quickly heal the bad symptoms of

Vietnam economy during 2007-2011, Vietnam government make use of macro policies which continuously change as the symptoms change. As a result of the fluctuation in macro policies (mainly monetary policies), interest rate also fluctuated greatly during this period. For instance, in 2008, in order to control inflation and the real estate assets bubble at the beginning of that year, Government quickly make use of monetary policy by increasing basic interest rate, refinancing rate and discount rate from 8.25%, 6.5%, 4.5% in Jan to 14%, 15%, 13%, by August 2008 which driven short-term lending rate to 21%. This combined with a few other administrative policies in real estate and stock market helped to put a stop to the assets bubble; but inflation is still looming in the background. Then came the global economic crisis that hit the world at the beginning of the third quarter in 2008. Fear that the global economic crisis will affect Vietnam, Government quickly sending a signal of loosen monetary policy by starting to decrease basic rate, refinancing rate and discount rate around November 2008. But then by the beginning of 2009, witnessing the devastating impact of the global financial crisis on major foreign economies as well as the deceleration of Vietnam GDP at the end of 2008 make the government to go even further by throwing out a stimulus package that subsidy short term working capital loan interest rate by 4%. As a result, lending rate for short-term loan was as low as 6.2% per annum by Mar-2009. This is in essence, pumping more money supply to the economy with the hope that it will stimulate aggregate demand in the short run in exchange for a higher risk of inflation in the long run. To make matter worse, this stimulus package didnt benefit the whole economy as intended. Many small SMEs who couldnt acquire enough documentation as well as enough connections werent able to touch this stimulus package. Only the big SOEs and a small portion of private firms with good connections were able to get this. Since most of the big SOE are so inefficient, the money supply pump that was supposed to stimulate aggregate demand was wasted in inefficient productions and even worse, some was misused in short-term financial investment. This ultimately feeds to the growing inflation that was looming in the back of the economy. Nevertheless, this wasnt the final stop, as GDP growth was not as good as expected, government decided to throw out a second stimulus package for subsidizing medium long-term loan interest rate by 2% in July 2009 (another money supply pump). This again benefits the inefficient big SOEs which further feed to the brewing inflation. Then came the Tet effect that breaks loose the inflation that was growing with each money supply pumps at the beginning of 2010. The remedy? Government quickly use their favorite monetary policy tool again by increasing basic rate, refinancing rate and discount rate by the end of 2009 and at the start of 2010. So within 2008 to the end of 2009, we can see that government has changed its monetary direction for three times, starting with the sudden tightening in Feb-2008, then suddenly loosening by Dec 2008 and further loosening in 2009 and then again suddenly tightening at the end of 2009 again. These sudden change in monetary policy lead to the sudden change in SBV rates (basic, refinancing rate and discount rate) which ultimately created fluctuation in lending rate. 3. Inconsistence in monetary policy and fiscal policy:

During 2007-2011, there are many instances where the inconsistence between monetary policy and fiscal policy or the inconsistence within the monetary policy itself can be spotted. These inconsistencies reduce the overall effectiveness of government policies or even worse, they can undermine government effort and intent in implementing macro economic policies and further contribute to inflation. In 2008, when tightened monetary policy was in effect in order to battle inflation, many firms when out of business due to the sudden close of the credit valve and most of these firms are private SMEs. On the other hand, big SOEs were still able to get their credit due to their priority status as well as their connection. A well-known example of this is Vinashin. While many other private SMEs was struggling to find a credit source, Vinashin was guaranteed by the government and was able to borrow VND20,000billions with a much lower interest rate compared to market lending rate at that time. This huge amount of money was later used to invest in Vinashin non-core business and eventually all go to waste which further contribute to the problem of inflation. Similarly, as mentioned above in 2009, if the first stimulus package was able to reach all businesses who need them instead of concentrating on big inefficient SOEs, policy makers could have stopped at this first stimulus package instead of introducing the second stimulus package which unnecessarily increase the money supply in 2009 that eventually sown the seed for inflation in 2010 and 2011. At the beginning of 2010, inflation is already ravaging the life of many lower income Vietnamese, and interest rate was kept at a higher level compared to 2009 to battle inflation. Although sudden changes in monetary policy have stopped, 2010 mark the year of inconsistence between monetary and fiscal policy. Since the 90s, Vietnam leaders have keened on keeping economic growth in order to keep away social unrest. Nevertheless, eventually this leads to a GDP growth addicting illness that follows every cabinet generation. The cabinet in 2006 - 2010 was also not an exception. In the first quarter of 2010, government publicly states its intention in containing inflation while still sustaining growth which was criticized by many economists as a paradoxical goal. Government couldnt make it clear whether containing inflation or sustaining growth was the main priority. Therefore, in order to implement this unclear policy, government tightened monetary policy a little by raising reserve ratio by 1%, decreasing credit growth room and then kept basic, refinancing, and discount rate the same through out 2010. Taking into account the big amount of money pump through the two stimulus packages in 2009, these measures are insufficient to contain inflation. To make matter worse, eventually the GDP growth addicting illness creep into the picture which makes sustaining growth having a somewhat higher priority than inflation. In order to ensure growth, fiscal policy is expanded by increasing government spending and increasing state borrowing despite claims by Mr. Nguyen Van Giau - governor of State Bank of Vietnam, that he was working closely with Mr. Vu Van Ninh - Minister of Finance in order to ensure that monetary policy are working in sync with fiscal policy. As a result, 2010 economic growth was sustained, but inflation wasnt really tamed. Inflation slowly and gradually creep into the economy, waiting for a chance to break loose and finally it got its chance to

go wild at the beginning of 2011 due to Tet effect as well as commodity price hike in the first quarter of 2011. III. CONCLUSION In conclusion, Vietnams interest rate during 2007-2011 has been a thrilling roller coaster ride that is not for businesses that are not self-sustaining and financially weak (except for big SOEs). Interest rate was stable during 2007 and then suddenly surge to its record high in August 2008. Then came the global financial crisis and interest rate started to descend rapidly to its lowest by July 2009 due to the two stimulus packages from the government. Nevertheless, this sown the seed for inflation in 2010 and 2011 and in order to battle inflation, interest rate has been steadily increased since the beginning of 2010 till May 2011. Witnessing the devastating after effect of inflation from its stop-go and inconsistence macro economic policy during 2008-2010, the new elected cabinet in 2011 has decided that macro stability and quality economic growth is what Vietnam will aim for during 2011-2015. As a result, interest rate has been kept stable at high level since the beginning of the 2011 in order to contain inflation. In addition, there has also been some minor improvement in coordinating between monetary policy and fiscal policy. Whether the government can continue to keep its commitment to these goals in the coming years is questionable. At present, the most frequent ask question among businesses is when will interest rate go down? To answer this question and in order to forecast interest rate from now to the end of the second quarter of 2012, we have to consider two scenarios: The first scenario is that the EU debt problem is contained and nothing bad happen to the world economy in 2012. In this scenario, Vietnam government will likely to continue to keep its commitment in fighting inflation by keeping interest rate at a high level (although government may decrease interest rate a little in order to leave some room for businesses to breath). For this scenario, SBV basic interest rate may remain at 9% while refinancing rate and discount rate may be modified down to 13% and 12% respectively. Commercial lending rate will react and could probably fall back to 17% and 18% for short-term loan and medium long-term loan respectively. The second scenario is that the Merkorzy duo fails in leading the Eurozone out of the current debt problem and the world economy fall into another crisis in 2012 which lead to the decrease in commodity prices. In this scenario, Vietnam government may decrease interest rate further than the first scenario. SBV basic interest rate could be decreased down to 8% with refinancing rate and discounts rate retreat to 12% and 11% respectively. As such, commercial lending rate could fall to 15% and 16% for short-term loan and medium long-term loan respectively. Forecast for interest rate that goes further than the second quarter of 2012 will be difficult since there are two many macro variables. Businesses can hope that government has learned it lesson from 2007-2011 and will continue to keep it commitment in

restructuring the economy and ensuring a stable macro environment. Other than that, the best things businesses could do is to increase their adaptability and continuously renew themselves since there is only one thing that all economist can forecast with 100% accuracy which is the macro economic environment is dynamic and always changing.