Huge room remains for interest rate cuts: economist

Vietnam has ample room to make further interest rates cuts in the coming time as lending rates remain high while cash flowing into the economy is limited, said economist Le Xuan Nghia.

According to Nghia, a member of the National Financial and Monetary Policy Advisory Council, government monetary policy has shifted to support the recovery of the economy, with rapidly falling deposit interest rates. However, lending rates are still very high.

He pointed out three reasons for the State Bank of Vietnam (SBV) to continue cutting interest rates from now until the end of the year.

Firstly, the exchange rate is stable, placing almost no pressure on monetary policy. The U.S. Dollar Index (DXY) has fallen sharply from its peak of 115 points to 102 points, and is expected to settle at around 100 points.

"This shows that pressure on the VND/USD exchange rate is almost zero or very low," Nghia said.

Secondly, Vietnam's Purchasing Managers’ Index (PMI) from November last year to June this year moved sideways at around 46-47 points (except for February when it was 51.2 points due to seasonal factors) and started to recover slightly in July 2023 to 48.7 points, an increase of 2.5 points from June.

“The economy may have bottomed out and is recovering slightly, which will be more evident from the fourth quarter. Therefore, this is an important time to support the recovery of the economy,” he said.

Thirdly, Vietnam's interest rates depend on the trends of world central banks. It is forecast that the U.S. Federal Reserve (Fed) will stop raising interest rates at the year end and start lowering them in early 2024. European central banks will also sharply reduce interest rate hikes by the end of this year.

"The opportunity for the SBV to sharply cut interest rates is quite clear now and the room for further rate cuts in Vietnam is very large,” he commented.

However, Nghia noted that the important issue at the moment is not only interest rates, but also M2 money supply, which is very low compared to gross domestic product (GDP) at current prices. M2 is a measure of the money supply that includes cash, checking deposits, and other types of deposits that are readily converted into cash.

"GDP at current prices is somewhere around 7%, while money supply growth is only 3%. This is causing liquidity across the whole economy to dry up, although money held by commercial banks is still abundant," the expert said.

Nghia attributed the low credit growth to the strict requirements set by banks to access loans. "There are two conditions for granting credit, namely collateral and ability to repay debts in the future. In times of crisis, most countries only apply the second condition, but Vietnam resolutely applies both.

"In a difficult economic context, when there is a 'light' at the end of the tunnel, banks need to support businesses. They should give loans based on the business's ability to repay debts in the future instead of collateral," he emphasized.

The economist proposed that commercial banks, especially major ones, focus on the survivability of enterprises to decide whether to supply more credit or not. This will be the foundation to regain confidence in businesses and then the markets, especially the real estate and stock markets.

"Precious" stability

In its latest report, HSBC Global Research said after lackluster GDP growth of 3.7% in the first half of 2023, green shoots have quietly emerged. “Alas, the challenges are not fading, but high frequency indicators point to some positive stabilization,” it noted.

The biggest surprise was on the external front. While exports did not cease to fall year-on-year, the magnitude was much smaller at 3.5%.

Though this was in part due to favorable base effects, the level of exports in July rose to the highest in nine months. While major exports, including textiles and footwear and phones, continued to suffer double-digit declines, computer and electronic components surprisingly offset some weakness, jumping 32% year-on-year.

According to the HSBC research team, base effects came to the partial rescue, but signs are pointing to some valuable stabilization, especially from computer-related imports.

“Despite being still at an early stage, forward-looking PMI indicators point to some stabilization in Vietnam’s near-term trade prospects, with no further deterioration being the first step before a meaningful trade rebound,” they said.

Despite the ongoing external drag, Vietnam’s FDI prospects remain intact. New FDI stood at 3% of GDP in the second quarter of the year; on par with the figure in 2022. While it slowed from Vietnam’s peak of over 7 per cent in 2017, tighter global monetary conditions in recent years partly explain the slowdown.

But regionally, Vietnam still remains the second-largest FDI recipient in ASEAN, as measured as a percentage of GDP, just after Malaysia. Tech giants from around the world, including Infineon, LG, and Foxconn, continue to announce expansion plans in Vietnam.

“All of this provides hope for Vietnam’s external sector to rebound strongly once the trade cycle turns,” they noted.

Inflation continues to deliver some good news. Headline inflation rose only 2.1% year-on-year in July, well below the SBV’s 4.5% ceiling, thanks to continuing energy disinflation.

While robust services mean that inflation will likely decelerate at a slower pace than headline inflation, inflation dynamics have become less of a concern for the SBV.

“We expect the SBV to deliver another 50 bps rate cut, the last one in the current easing cycle,” the report stated. “Recently, the SBV has also signaled its openness to do more if ‘market conditions allow’.

In the government's Resolution 124 issued on Thursday, Prime Minister Pham Minh Chinh requested the State Bank of Vietnam to coordinate with agencies and localities to continue the proactive, timely, flexible, appropriate and effective operation of the monetary policy in sync and harmony with fiscal and other policies to strongly promote economic growth and remove difficulties for production and business.

The central bank was asked to stabilize the foreign currency market and manage the exchange rate in accordance with the situation.

It needs to promptly and effectively implement policies on debt payment rescheduling, postponement and restructuring; take drastic management measures to continue reducing interest rates, especially lending rates; and increase money supply.

The PM required an appropriate credit increase in association with credit access improvement, focusing on production and business, priority areas, and growth drivers of consumption, investment, and export.