Given the weak economic outlook in Vietnam, Fitch Solutions expects further easing measures to be applied over the rest of 2020 as the country is still targeting real gross domestic product (GDP) growth above 5%.
The international rating agency said in a recent statement that the State Bank of Vietnam (SBV) cut its benchmark interest rates on May 12, taking the refinancing rate to 4.5 percent from 5%, the discount rate to 3 percent from 3.5 percent and the overnight interbank lending rate to 5.5 percent from 6%.
“In light of the weak economic outlook, we see scope for further monetary easing both in benchmark rate cuts and other macroprudential measures,” stated the agency.
Therefore, Fitch Solutions expected cuts of another 50 basis points to the benchmark rates, which would take the refinancing rate to 4 percent and the discount rate to 2.5%.
In addition, the agency forecast Vietnam’s real GDP growth will decelerate to 2.8 percent in 2020, from 7 percent in 2019.
It pointed out weak external demand from a world economy in recession will hamper a recovery in the country’s large manufacturing industry, and a general aversion to international air travel due to contagion fears will continue to hurt the tourism sector. “We now see upside risks to our growth forecast as Vietnam is in the process of gradually reopening its economy with the easing of movement restrictions,” said Fitch Solutions.
The reopening of the Vietnamese economy follows quick and stringent Covid-19 containment measures over the first four months of the year, in addition to growing reports of companies seeking to relocate their production from China to Vietnam.
The government revised its real GDP growth target for 2020 to “above 5%,” according to reports quoting prime minister Nguyen Xuan Phuc’s address at the country’s largest business conference in early May.
Fitch Solutions viewed this target as overly ambitious given the benign global economic backdrop. “To be sure, we forecast the global economy would contract by 2.8%,” stated the agency.
As such, Fitch Solutions believed that the SBV is likely to persist with its monetary easing cycle over the coming months in the form of benchmark interest rate cuts and macroprudential measures to support the government’s achievement of its growth target.
Inflation to stabilise
Manageable inflation below the government’s 4 percent target in 2020 will allow for further monetary easing, according to Fitch Solutions.
The agency predicted inflation would average 3.8 percent in 2020, down from 4.9 percent year-on-year over the first four months of 2020.
It also expected subdued fuel prices due to the ongoing global supply glut would result in a transport price deflation and low core inflation owing to weaker domestic demand. This is expected to partially offset high food inflation brought about by African swine fever, which prompted a significant culling of the hog herd toward the end of 2019, pushing up meat prices.
“Our average forecast of 3.8 percent is above the 2.9 percent year-on-year inflation recorded in April,” noted Fitch Solutions, adding that the April reading is likely to be somewhat of a one-off phenomenon.
The agency explained that the country was on lockdown during the period, which would have dragged heavily on economic activity.
“With movement restrictions now being eased, we expect a gradual pick-up in demand post-lockdown to see inflation stabilise slightly higher over the remainder of the year,” claimed Fitch Solutions.
Ample liquidity available
Despite the expectations of further monetary easing, Fitch Solutions maintained its view that the key problem in Vietnam is the lack of loan demand and investment appetite amid elevated economic uncertainty, brought about by the Covid-19 shock on the world economy.
The agency predicted that further interest rate cuts at this juncture will not provide much of a boost to the economy.
“There is ample liquidity in the market with short-term interbank lending rates a notch below the SBV discount rate,” remarked Fitch Solutions.
Further, the agency highlighted a key risk stemming from the authorities’ desire to strongly outperform the region’s growth in 2020 through aggressive monetary easing: Vietnam could be over-expending its monetary policy space at this time, which reduces the space for conventional monetary stimulus if the country faces another crisis in the future.
