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Economic update – Easing pressure on monetary market

Economics Note 13/02/2023    193

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  • CPI increased by 4.9% yoy in Jan 23, the highest level since Mar 20.
  • Yields on Vietnam’s 5-year and 10-year government bonds fell sharply by 42 and 38 basis points, respectively, in Jan 2023.
  • According to our estimates, the SBV bought about US$3.6bn in foreign exchange reserves since the beginning of 2023.

Domestic demand is still positive so far but expected to weaken
Service sector kicked off the new year positively with gross retail sales of consumer goods and services grew 5.2% mom and 20% yoy, higher than that of 17.5% yoy increase seen in Dec 22. However, we believe the early arrival of Tet Holiday this year (in Jan) attributed to the strong yoy growth of domestic demand. Thus we expect service, including retail, will weaken in the coming months as shrinking manufacturing sector and gloomy property market.

Vietnam’s CPI climbed to the highest level in nearly 3 years
On mom basis, CPI rose strongly by 0.5%, mainly due to the increase of food and beverage prices. Specifically, Food & Foodstuff CPI increased 0.8% mom while Beverage & Tobacco CPI rose by 1.1% mom as consumer demand picked up during Tet Holiday. In addition, transport CPI increased by 1.4% mom due to the recovery of domestic gasoline prices in Jan 2023. On a yoy basis, CPI increased by 4.9% yoy in Jan 2023, the highest level since Mar 2020.

SBV lifted the foreign exchange reserves amid easing FX pressure
The decrease of the US$ in the international market has contributed to reducing pressure on the VND exchange rate in Jan 2023. Specifically, as of 31 Jan 2023, the US$/VND exchange rate on the interbank market fell to 23,450 from 23,633 on 31 Dec 2022. According to our estimates, the SBV bought about US$3.6bn in foreign exchange reserves since the beginning of 2023. The increase in foreign exchange reserves helps strengthen the VND as well as support liquidity for the economy.

The uptrend of interest rates will approach the pivot point in 1Q23
We expect the deposit rate to peak out in 1Q23 and then cool down since 2Q23. basing on the following arguments: (1) FED’s policy rates will peak out in 2Q23, which will ease the pressure on Vietnam’s exchange rate and interest rates, (2) SBV will be more proactive in supporting market liquidity through open market channel or buying foreign exchange reserves, (3) weak lending demand due to economic slowdown and murky residential property market. We lower our forecast that the average 12-month deposit rate will drop to 7.5%/year by the end of 2023, lower than the previous forecast of 8.0-8.5%/year

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