Vietnam central bank likely to hold after 100bps cut: Maybank

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MARCH 17, 2020 - 9:31 PM

FURTHER monetary easing by Vietnam's central bank cannot be ruled out amid a worsening coronavirus-led global health crisis, said Maybank economists on Tuesday, although it is expected to stay on hold after surprise rate cuts.

The State Bank of Vietnam (SBV) announced late Monday a 100 basis-point (bps) cut to its refinancing rate from 6 per cent to 5 per cent, while lowering the discount rate by 50bps to 3.5 per cent.

"With the aggressive 100bps cut in the bag, we now expect to SBV to stay on hold for the rest of 2020, but further easing cannot be ruled out given growing uncertainty over the Covid-19 outbreak," Maybank Kim Eng economists Linda Liu and Chua Hak Bin said in a report.

Additional fiscal support measures may be needed to stimulate domestic demand, if Covid-19 shows no abatement in the second half of the year, the report said.

SBV said the rate cut is necessary to ease difficulties faced by businesses and production activities, given the negative impact Covid-19 has brought to economic activity worldwide.

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Maybank said even though there are signs that the Chinese economy is recovering, which should help ease potential supply chain disruptions to Vietnam, the increasing number of countries - including the US and Europe - announcing emergency restrictions would likely dampen external demand and "cause deeper pain to the economy".

It added that exports to the US comprised 23.2 per cent of total exports in 2019, while Europe is at 15.7 per cent.

Maybank noted that SBV’s move - similar to the rate cut in September 2019 - aims to support local banks to manage their average cost of funds in order to stabilise lending rates to local businesses.

However, it said there may be a limited effect on boosting credit growth in the near term.

Credit growth year-to-date (as of March 9) was almost flat at +0.1 per cent as demand for new loans weakens on Covid-19, as compared to +0.85 per cent growth over the same period last year, according to SBV officials.

"Our Vietnam Banks analyst, Thanh, estimates that under a base case expectation that Covid-19 is controlled by end-April, system-wide credit growth may be 150-200bps lower than the +14 per cent target, while leading banks’ FY20E credit growth is estimated to grow by +13-14 per cent," the bank said.

Meanwhile, Maybank is expecting SBV to stay on hold for the rest of the year.

It added that despite the recent collapse in oil prices, headline inflation would likely come in around the inflation target of +4 per cent in the coming months due to food price pressures, constraining SBV’s policy space.