According to economists from HSBC, 2023 has been a tough year for Viet Nam’s economy. Amid intensifying downside risks to growth, the SBV has decided to loosen monetary policy further. In less than three months, the SBV has delivered surprising cuts to its policy rate three times, each time of 50bp.

After becoming the first Asian central bank to cut its policy rate in early April, the SBV cut again in late May before making another announcement on June 16. Effective from June 19, the SBV’s refinancing rate will be 50bp lower, at 4.5 per cent.

Other key rates will be lowered too. The discount rate will be cut by 50bp to 3.0 per cent while the overnight lending interest rate for inter-bank electronics payments will be lowered to 5.0 per cent. Meanwhile, the maximum interest rate to demand deposits with terms of less than one month will be kept unchanged at 0.5 per cent per year, but demand deposits with a term of between one and six months will be reduced by 25bp to 4.75 per cent per year.

Economic implications

The decision on June 16 is a clear reflection of the SBV’s urgency to further support growth via the credit channel. This will continue to reduce financing costs for businesses and households, thus spurring business investment and supporting consumer sentiment.

Sluggish external data remains the biggest downside risk to growth. Exports have fallen by over 10 per cent year-on-year year to date (YTD), with broad-based weakness.

On the bright side, Viet Nam’s services sector remains a bright spot, partially shielding some weakness to an extent. However, there is a clear divergence between big ticket items, including automotive sales and tourism-related services. On a three-month-moving average, the former plunged over 40 per cent year-on-year, almost on par with that during the lockdown period in 2021. This suggests weakness in the external sector has filtered through to private consumption.

Encouragingly, Viet Nam continues to see a positive influx of tourists. Viet Nam has welcomed close to one million tourists in the past two months, equivalent to 70 per cent of 2019’s levels. Korean tourists have recovered to 80 per cent of the pre-pandemic level.

In addition to the urgency of supporting growth, the move on June 16 continues to reflect two of the SBV’s considerations. For one, the SBV has maintained its optimistic tone about inflation prospects, again citing that “inflation is under control”. Indeed, inflation has been consistently cooling down, recently moderating to below 3 per cent year-on-year. This is further away from the SBV’s 4.5 per cent ceiling, thanks to supportive global energy prices and easing local food inflation.

The 3-per-cent hike of the average retail electricity price at the start of May, which typically factors in inflation with a one-month lag, will also pose manageable upside risks. Given recent developments, we are cutting our 2023 inflation forecast to 2.6 per cent instead of 4.0 per cent previously.

The other key consideration is currency stability. Despite recent strength in the US dollar, Vietnamese dong has remained relatively stable, thanks to its improving current account dynamics. While Viet Nam has been suffering from trade headwinds, its imports have plunged much more than exports, given its import-intensive nature in the manufacturing sector. Accordingly, its trade surplus doubled to US$2bn per month on average in 2023. That said, how USD/VND evolves warrants a closer watch, as the Fed is unlikely to have completed its tightening cycle. — VNS