Vietnam central bank expected to further cut rates in Q3: HSBC

The State Bank of Vietnam (SBV) is expected to deliver one more 50-basis point rate cut in the current easing cycle, sometime in this year’s third quarter, to further support the country’s growth, HSBC Vietnam said.

HSBC Vietnam predicted the likely SBV cut in its newest analysis of the country’s economic conditions.

“We are trimming our 2023 growth forecast slightly to 5% from our previous 5.2%, taking into account a protracted and a deeper-than-expected trade downturn. We now expect a meaningful economic rebound from this year’s fourth quarter, warranting further monetary support,” the HSBC report said Monday.

“After delivering an accumulative of 150-basis point rate cuts in the second quarter, we expect one more 50-basis point cut in the third quarter.”

This will likely bring Vietnam’s policy rate to 4.0%, reversing all tightening efforts in 2022, also on par with its rate cuts during the pandemic.

However, HSBC said there is also a risk that further cuts may not be needed in this year’s second half if growth bottoms out earlier than expected.

The SBV’s latest cuts took effect on Monday, with its refinancing rate being 4.5% per annum, 50 basis points lower. Other key rates are also lowered: the discount rate is cut by 50 basis points to 3%, while the overnight lending interest rate in inter-bank electronics payments is lowered to 5%. Meanwhile, the maximum interest rate for demand deposits with terms of less than one month is kept unchanged at 0.5% per year, but demand deposits with a term of between 1 and 6 months are reduced by 25 basis points to 4.75% per year.

The newest SBV cuts continue to reduce financing costs for businesses and households, thus spurring business investment and supporting consumer sentiment.

This year has been a tough year for Vietnam’s economy. After seeing sharply slowing growth of only 3.3% year-on-year in the first quarter of 2023, Vietnam continues to brace for strong headwinds. While high-frequency indicators point to no further deterioration, there are also no clear signs that Vietnam’s economy is bottoming out.

Vietnam’s exports have fallen by over 10% year-on-year so far this year. Despite external woes, Vietnam’s services sector remains a bright spot, partially shielding some weakness to an extent, the HSBC report said.

However, there is a clear divergence between big-ticket items, including automotive sales and tourism-related services. On a three-month-moving average, the former plunged over 40% year-on-year, almost on par with that during the lockdown period in 2021. This suggests weakness in the external sector has filtered through to private consumption.

Encouragingly, Vietnam continues to see a positive influx of tourists. Vietnam has welcomed close to one million tourists in the past two months, equivalent to 70% of 2019’s levels. Two of its major sources of tourism merit attention. South Korean tourists have recovered to 80% of the pre-pandemic level, but the ratio stands at only 35% for Chinese tourists. Fortunately, the supply-side of bottlenecks continue to show signs of further easing.

Vietnam has restored direct flights with China to around 40% of 2019’s level, the second highest in ASEAN, just after Singapore (53%). Meanwhile, the long-anticipated relaxation on visa restrictions is under National Assembly consideration. With efforts to boost tourism, Vietnam will likely see a punchier boost in this year’s fourth quarter, though later than HSBC Vietnam’s original estimates.

HSBC said the Vietnamese central bank’s newest rate cuts mean the SBV has maintained its optimistic tone about inflation prospects, again citing that “inflation is under control”.

The move also shows currency stability. Despite recent strength in the USD, VND has remained relatively stable, thanks to its improving current account dynamics. While Vietnam has been suffering trade headwinds, its imports have plunged much more than exports, given its import-intensive nature in the manufacturing sector.

Therefore, Vietnam’s trade surplus doubled to $2 billion per month on average so far this year. That said how USD-VND evolves warrants a closer watch, as the U.S. Federal Reserve is unlikely to have completed its tightening cycle, according to HSBC Vietnam.