Two interest rate scenarios are offered but the possibility of slight increase is more likely to come real.
The year of 2019 started with the announcement of many big banks to reduce the interest rate of lending in dong at the recent meeting of Deploying banking tasks. It can be said that their announcement at the same time has happened for many years.
Last year, the State Bank of Vietnam (SBV) has actively reduced the bidding interest rate in the open market, from five per cent to 4.75 per cent per year, in order to support credit institutions to reduce lending rates. However, despite SBV’s great efforts, banks still cannot reduce interest rates as desired.
The recent interest rate story has become a concern for various customers when looking at the sign of increase from last October. Accordingly, the deposit interest rate is quite hot in the market, especially for short-term deposits in the last months of 2018. More specific statistics showed that the mobilising interest rates started to increase sharply from the end of October until now. Although the rates have been stable at 4.8-5.5 percent for tenors of less than 6 months, 5.5-7.6 percent for 6-12 month term and about 6.8-8.6 percent for 12-13 month terms.
The interest rate level in 2018 is generally higher than the previous year. In fact, many experts asserted that high deposit rates had its seasonal factors, because interest rates often rose sharply in the last months of the year, close to the Lunar New Year. However, the increase in deposit interest rates led to concerns about the adjustment of the lending rates of many banks because their capital costs had increased significantly.
This year, the increasing interest rate scenario continues to be forecasted by credit institutions. At the recent seminar on money and real estate market, Nguyen Tu Anh, deputy director of the Monetary Policy Department of SBV, re-conducted a survey of 28 credit institutions. Among them, 17 credit institutions assessed that interest rates this year would increase insignificantly.
The interest rate level is expected to be similar to inflation and exchange rate; two factors were quite well controlled in 2018 and are forecasted to continuously be stable this year. In fact, according to Dr Le Xuan Nghia, director of the Institute for Business Research and Development, Member of the National Monetary and Financial Advisory Group, Vietnamese market is increasingly open to the world economy and interest rate pressures mainly come from capital inflows and outflows. The world economy has changed dramatically since last June, when the US-China trade war began, directly affecting Vietnam’s capital inflows and outflows and exchange rates.
Last year, dong was one of the most stable currencies in the region, helping to limit the capital withdrawn out of the market and stabilise the macro. For the whole year of 2018, dong depreciated by 2.2-2.3 percent against the US dollar, much lower than the depreciation of euro, pound and Chinese Yuan (4.5 percent, 5.7 percent and 5.4 percent respectively) (according to SSI Securities Company). “Last year, cash flow has fled from emerging economies but Vietnam still had a positive cash flow,” Dr Nghia said.
This year, SSI assesses that it is unlikely that “sudden” movements will adversely affect market sentiment. However, one thing to be noted is that the Chinese Yuan will continue to depreciate, putting certain pressure on dong directly and on interest rates indirectly. The next context is still the situation where big currencies like US dollar tend to appreciate, making other currencies under pressure. However, some experts believe that the increase in 2018 has reached the threshold; it will be hard to increase sharply this year.
Another factor affecting interest rates is the improvement of the public investment disbursement, which is now very slow. “If this capital inflow to the market is boosted in 2019, banks will ease the pressure to raise interest rates,” Tu Anh said.
Currently, the experts all offer two scenarios. “The interest rate level will stand at a high level and do not rule out the increase if the exchange rate pressure appears. Once the exchange rate or inflation is well controlled, along with the demand for economic stimulus, SBV may be ready to adjust the rates”, SSI Securities Company assessed.
However, a more optimistic assessment from the National Financial Supervisory Committee showed that interest rates in 2019 had many favourable factors such as decreased inflation pressure when the world oil prices did not fluctuate much and weakening US dollar forecast reduce the pressure from the exchange rates.
In contrast, interest rates are under high pressure due to the world commodity price fluctuation and capital restructuring by credit institutions to ensure safety ratios such as reducing short-term capital for medium and long-term loans ratio to 40 percent and preparing for Tier 2 capital increase according to Basel II, reported by the National Financial Supervisory Commission.
