Vietnam central bank has limited room for further monetary loosening: Dragon Capital

The Vietnamese central bank has limited room to further loosen monetary policy given adverse external factors and a pickup of inflation at home, leading fund manager Dragon Capital said in a recent note.

Interest rates in Vietnam are unlikely to continue dropping if the U.S. dollar strengthens and yields of the U.S. 10-year treasury bonds remain elevated, Dragon Capital added.

The fund management firm commented that the State Bank of Vietnam’s recent massive money withdrawal did not indicate a reversal in its monetary policy, but was instead a normal regulating activity.

In addition, liquidity in the banking system remains ample, evidenced by a number of banks cutting deposit rates by another 10-20 basis points in September.

Dragon Capital attributed a fall of 7% month-on-month of the VN-Index, the main gauge of Vietnam’s stock market, to broad-based profit taking due to concerns that the U.S. Federal Reserve may raise rates further, triggering net-selling by foreign players.

Foreign investors net sold a total of $185 million in September, up 73% from August. They continued to net offload nearly $100 million in the first half of October, according to exchange data.

Looking forward, Dragon Capital expected corporate earnings for the July-September quarter to be lower than expectations. Banks struggled with sluggish credit growth while firms with foreign currency-denominated loans faced forex risks.

Companies in the retail, securities, steel, and chemicals sectors are forecast to outperform in the third quarter, it added.

In its report last week, HSBC removed its earlier call of another 50 basis-point rate cut by the State Bank of Vietnam for the rest of this year as the conditions that previously warranted the move had dissipated.

Upside risks to inflation have resurfaced, prompting the bank to upgrade its 2023 average inflation forecast to 3.4% from 3.2%.