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Viet Nam money market chartbook – More supportive measures to come

Economics Note 09/05/2023    171


  • The Fed raised its target range for the Federal Funds rate to between 5% and 5.25% and hinted that the current tightening cycle is at an end.
  • The State bank of Vietnam (SBV) announced to buy US$6bn in foreign exchange reserves since the beginning of 2023.
  • We expect the SBV to cut its policy rates further by at least 50 basis points towards the end of 2023.
  • We maintain our forecast that the average 12-month deposit rate will drop another 50 basis points to 7.0% p.a. by the end of 2023.

The Fed’s rate hike cycle is coming to an end

In a unanimous decision widely expected by market, the Fed announced its 10th-straight interest rate hike at its last meeting, raising the benchmark rate by 0.25 percentage points to a target range of 5-5.25%. Additionally, the post-meeting statement omitted a sentence contained in the Mar meeting documents that said “The Committee anticipates that some additional policy firming may be appropriate” for the Fed to achieve its 2% inflation goal. It gives a tentative hint that the current tightening cycle is coming to an end. After the Fed’s somewhat dovish statements on upcoming policy, the market now expects the Fed to pause rate hikes at its Jun meeting and cut rates as early as 2H23 due to the possibility of a recession.

Lower pressure on VND exchange rate

As of May 8, 2023, DXY fell to 101.1pts, down 4.0% before the Silicon Valley Bank (SVB) crash. The softer DXY has brought the US$/VND down 0.8% ytd to 23,449. Thanks to lower exchange rate pressure, the SBV has increased foreign exchange reserves by about US$6bn since the beginning of 2023. As a result, the SBV has pumped out about VND140,000bn into the economy to buy US$, thereby supporting liquidity of the banking system and lowering domestic interest rates. For 2Q23, we see downward pressure on the US$/VND exchange rate as Fed could pause its rate hike cycle as soon as its next meeting in Jun 2023 and expect the US$/VND exchange rate to fluctuate between 23,400-23,700.

The SBV delivered additional measures to support the economic growth

On Apr 23, 2023, the SBV announced Circular 02/2023 to guide credit institutions to review and reschedule principal/interest payments or maintaining debt group for customers who are (1) facing liquidity problems to run businesses and (2) losing demand for consumer loans. In addition, the SBV also announced Circular 03/0223 allowing the postponement of Article 11 Clause 4 of Circular 16/2021. This means banks are still able to buy back unlisted corporate bonds sold/distributed by them with several conditions. Moreover, the SBV is studying the draft amendment to Circular 41/2016. It aims to lower the risk factor of industrial property loans and loans to social housing group, in general, pointing out that lending to those segments are encouraged. We expect that these supportive measures coupled with lower lending rates will improve the credit growth outlook in 2H23. As of Apr 25, 2023, credit of the whole economy rose by 2.75% ytd (vs. +7.2% ytd in 4M22).

…and may continue to lower its policy rates

In Mar-23, the SBV had two reductions in its policy interest rates, which marks a reversal in the domestic monetary policy. As the risk of a recession in the US economy is increasing, the market expects the FED to pause its rate hike cycle as soon as its next meeting in Jun 2023. In this case, the pressure on VND exchange rate and domestic interest rates will ease further. Therefore, we expect the SBV to cut its policy rates further by at least 50 basis points in the remaining of 2023.

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