Vietnam’s economy has recently grown rapidly. Growth is likely to weaken slightly this year.
(Photo: IMAGO/agefotostock)
Bangkok Vietnam surprisingly became the first country in Asia to end its rate hike cycle. The central bank of the Southeast Asian emerging market cut several of its key interest rates significantly on Wednesday. The currency watchdogs reduced the discount rate – an element of the general key interest rate level – as well as other variables by one percentage point from 4.5 to 3.5 percent.
The central bankers want to brace themselves against the economic slowdown. Several macroeconomic indicators have deteriorated, the central bank said in a statement the previous day. At the same time, domestic inflation has been brought under control. The key interest rate cut now follows the government’s requirement to remove the obstacles to growth.
According to the state statistics agency, Vietnam’s economy grew by eight percent last year, making it one of Asia’s growth engines. For the current year, the World Bank expects the growth rate to drop to 6.3 percent.
In a report published on Monday, she warned, among other things, of the negative effects of rising interest rates on private investments in the country, which has recently been able to assert itself as an increasingly popular alternative location to China for international corporations.
The signs of a possible end to Vietnam’s boom have become clearer in recent months: In January and February, industrial production fell by 6.3 percent year-on-year due to weak global demand. Credit growth slowed to 0.8 percent during the period – just a third of the growth rate a year earlier.
Crisis in the real estate market in Vietnam
Vietnam’s real estate sector, which is struggling with a credit crunch and acute liquidity bottlenecks, is also badly hit. Novaland, the country’s second-largest real estate developer, announced last month that it would not be able to repay a bond on time.
The company is not alone with the payment difficulties. According to the Hanoi Stock Exchange, more than 50 Vietnamese companies were in arrears with their bond payments by the end of January – a large number of which come from the construction industry. The problems have increased rapidly: only six bond issuers had reported late payments in the previous month.
Vietnam’s stock market reacted positively to the lower interest rates.
(Photo: STRINGER Vietnam)
The problems in the real estate sector had recently been exacerbated by fraud scandals and the arrests of high-ranking managers. Funding sources for the industry dried up because of lost confidence.
The government in Hanoi is concerned. Prime Minister Pham Minh Chinh on Sunday instructed the central bank to “take appropriate measures” to ease the credit crunch. Banks must be given “leeway to lower interest rates on commercial loans for homebuyers and real estate projects,” he added, according to a statement.
With the interest rate cuts, the central bankers are now following the guidelines. They are thus reversing part of the interest rate hikes of the past year.
>> Read here: US inflation falls sharply in February – but the Fed faces a difficult mission
Easing inflationary pressures favored the move. In February, Vietnam reported the first decline in the inflation rate in six months. At 4.3 percent, the inflation rate was only just below the inflation target of 4.5 percent set by the central bank for the current year.
How analysts classify the decision from Vietnam
Analyzes also see the decision in connection with the changed interest rate policy expectations of the US Federal Reserve, which, as a result of the problems in the US banking sector, could raise its key interest rates next week less than originally forecast. “The US Federal Reserve is expected to moderate its rate hikes,” commented BIDV chief economist Can Van Luc. “That will ease the pressure on interest rates and the Vietnamese dong.”
Khoon Goh, Asia analyst at Australia-based bank ANZ, commented that Vietnam’s central bank may have felt bolstered by the dollar’s weakness as it reassessed Fed intentions. However, he added: “The decision should not be seen as the start of a broader easing cycle in Asia.”
The Vietnamese stock market reacted positively to the interest rate cut: the VN index of the stock exchange in the South Vietnamese economic metropolis Ho Chi Minh City rose by 2.1 percent on Wednesday. Financial companies and real estate groups were particularly in demand. The course of the securities dealer SSI increased by almost seven percent. Novaland closed with a plus of around six percent.
More: What emerging market investors can learn from the example of Vietnam.