Vietnam central bank likely to keep policy rates steady through 2024: UOB

The Vietnamese central bank is expected to keep its key policy rates unchanged for the rest of 2024, driven by steady macroeconomic conditions, said analysts with leading Singaporean bank UOB.

The analysts made the prediction assuming a domestic economic recovery, latent inflation pressures, and a weakened Vietnamese dong (VND), which has fallen to a record low against the U.S. dollar.

They observed that instead of rate changes, the SBV is focusing on boosting credit growth to support economic activities, emerging sectors, green transition, the circular economy, and social housing.

Its latest guidance on May 31 aims for credit growth of 5-6% by the end of this month, and lowering of lending rates by one to two percentage points through simplified loan procedures, cost-saving measures, and the application of digital technology.

According to the State Bank of Vietnam (SBV), credit growth until May 10 had reached 1.95% since the beginning of 2024, or an increase of VND264.4 trillion ($10.4 billion). The figure is well short of this year’s growth target of 14-15%, or roughly VND2,000 trillion ($78.62 billion).

In 2023, bank lending rose 13.5% year-on-year, vs. the 14-15% target.

The UOB analysts said that with activities on the mend, and with inflation rates hovering just below target, as well as concerns about the domestic currency, the possibility of lowering interest rates has diminished. Raising rates at this juncture may run the risk of hampering credit and liquidity.

“As such, we believe SBV will keep its refinancing rate at the current level of 4.5%, and focus its efforts on facilitating loans growth and other support measures,” they added.

Despite improving domestic fundamentals, the VND has been held hostage to broad-based USD strength in Q2/2024 and traded to a record low of close to VND25,500 a dollar.

The SBV said it had intervened in the forex markets to keep currency losses and volatility in check.

The analysts reiterated that the VND may recover in the second half this year as external pressures from the USD ebb ahead of an expected Fed rate cut in September.

In addition, the VND is likely to benefit from a subsequent recovery in the CNY in H2/2024 as China’s economy shows clearer signs of stabilization.

They updated USD/VND forecasts at 25,200 in Q3/2024, 25,000 in Q4/2024, 24,800 in Q1/2025 and 24,600 in Q2/2025.

GDP growth set to gain momentum

They noted that Vietnam’s economic recovery is likely to continue into H2/2024. The economy expanded 5.66% year-on-year in Q1, surpassing the 3.41% gain in the same quarter in 2023 and marking its strongest Q1 performance since 2020.

This was attributed to a resurgence of both the manufacturing and services sectors, as well as an acceleration in external trade to its fastest pace since 2021, which reversed the decline seen through most of 2023.

An increase in foreign direct investments indicated investors’ continued confidence in Vietnam’s political environment and competitiveness. FDI inflows in Jan-May rose 7.8% year-on-year to $8.3 billion in May, the fastest in the five-month period since 2018, following the record inflows of $23.2 billion in 2023.

Based on data released to-date, the analysts expected GDP growth to pick up to 6% year-on-year in Q2. They also kept their growth forecast for Vietnam unchanged at 6.0% for 2024, in line with the official target of 6.0-6.5%.

Standard Chartered Bank on April 24 lowered Vietnam's 2024 GDP growth forecast to 6% from 6.7% in January due to lower-than-expected Q1 growth and global trade headwinds. However, it is still an improvement from 5.05% in 2023, according to the bank's macro-economic updates about Vietnam.

The Asian Development Bank (ADB) retained the country's GDP forecast this year at 6%, the bank said in its April 2024 edition of the Asian Development Outlook (ADO).

The World Bank in its “Taking Stock” report released on April 23 said that Vietnam’s economy "has shown signs of uneven recovery in early 2024 and economic activities are expected to firm up in the second half of this year".

At the IMF’s press briefing on the Regional Economic Outlook for Asia and Pacific on April 19, Krishna Srinivasan, director of its Asia and Pacific department, noted that over the medium term, the IMF expects growth at about 6.5% in Vietnam, and “there are opportunities from digitalization and green transition”.