Vietnam’s credit growth will slow down this year due to the impact of the Covid-19 epidemic. It is forecast to reach only about 10%, which is lower than the target set by the State Bank of Vietnam (14%) in the beginning of the year.
According to the analysis of Mirae Asset Securities Company, the second reduction in interest rates by the State Bank in 2020 will later lead to a sharp decrease in interbank interest rate. Interest on this market is always well managed through the net pump and withdrawal on open market operations (OMO). The SBV therefore expects lending rates to fall to stimulate credit growth, estimated at 10% in 2020.
This credit growth rate will however be lower than the growth of previous years, which was recorded at nearly 14% in 2019 and approximately 13% in 2018.
The purpose of interest rate cuts is to help promote growth by stimulating investment, restoring production at lower capital costs, at the same time enhancing the repayment capacity of borrowers and increasing the demand for loans, thereby indirectly reducing bad debts.
Lower interest rates, according to Mirae Asset, will affect both the mobilization and lending of commercial banks. However, this is a two-way impact, so banks' net interest income (NIM) margin will be offset, thereby less affected.
For debt markets and capital markets, the yields of these markets are often correlated with the operating rates. Government bond yields have dropped sharply since the beginning of 2019, creating a divergence between bond yields and equity yields in the capital market. With this second reduction in interest rates, this securities company believes that bond yields will continue to fall, leading to lower stock yields. Mirae Asset, therefore, expects stock prices to rise to make stock earnings yields fall and in line with bond yields.
The second interest rate cut in 2020 took place in the context that the Covid-19 epidemic had had bad effects on the Vietnamese economy. GDP only increased by 3.82% in the first quarter, which is the lowest level in the past ten years.
This is also the third interest rate cut by Vietnam within a year (with the first was in September 2019 and the second was in mid-March). There will be not much room for interest rate cut, according to Mirae Asset, and inflation should be paid attention to as it may cause negative real interest rates.
Meanwhile, Vietnam's Purchasing Managers' Index (PMI) slipped to 32.7 points in April, which dropped sharply from 41.9 points in March. This shows a decline in purchase power of the manufacturing industry. On top of that, business conditions in Vietnam have worsened over the past three months.
Source: Mirae Asset
Writer: Henry Tran - VietnamCredit