According to Fitch Solutions, this was likely due to self-imposed capital constraints faced by banks as they transition to the Basel II standards. Given that major lenders in Vietnam have already transitioned or are on track to fulfil the Basel II requirements in 2020, credit growth is expected to stabilise at 12.5% in 2020.

Monetary easing by the SBV at the end of 2019 will also aid credit growth during 2020. While the SBV is unlikely to ease interest rates further over 2020, as it turns its focus towards managing high inflation, alternative measures of targeted monetary easing could still be on the cards.

Compliance with Basel II requires banks to meet minimum capital requirements, undergo the supervisory review process, and maintain market discipline, aimed at enhancing competition and transparency in the banking system.

As part of the minimum capital requirements, banks are to have a minimum capital adequacy ratio of 8.0%. According to a Vietnam News report on December 30 2019, only 16 out of 38 local banks in Vietnam had met the Basel II standard.

However, Fitch Solutions notes that two out of the 16, namely Vietcombank and BIDV, are among Vietnam’s big five largest lenders.

Among the remaining three, it was reported that Vietinbank and Agribank, are on track to meet the Basel II capital requirements in 2020, while Saigon Commercial Bank (‘Sacombank’) was reportedly ready to apply for Basel II in mid-December 2019.

Given that the big five lenders in Vietnam account for 48% of total assets in the banking sector, we believe that their meeting of Basel II capital requirements will halt the two-year deceleration in credit growth over 2020.

A stabilisation of credit growth will reduce pressure on the central bank to deliver any broad-based monetary easing through its benchmark policy rates to strengthen economic growth and instead allow it to focus on managing inflation. Accordingly, Fitch Solutions forecast Vietnam’s benchmark refinancing rate to remain at 6.00% through 2020. Inflation surged to 5.2% y-o-y in December 2019, from 3.5% y-o-y in November 2019 and 2.2% y-o-y in October 2019, on the back of surging food inflation (40% of the inflation basket). Food inflation almost doubled to 9.2% y-o-y in December 2019, from 5.6% y-o-y in November 2019, on the back of rocketing pork prices due to the outbreak of African Swine Fever, which has affected all 63 provinces in Vietnam.

The spike in food inflation implies that the shortage in pork supply has begun to grip the country following months of excess pork supply due to panic slaughtering of the herd, which has the effect of depressing prices.The existing pork supply shortage is likely to persist over 2020, and this would also put upside pressure on the prices of other animal protein.

Moreover, Fitch Solutions forecast that moderate transport inflation (as opposed to deflation over most of 2019) over the coming year informed by its Oil and Gas team’s forecast for Brent oil prices to average USD65.00/bbl in 2020, up from USD64.00/bbl in 2019.

Core inflation also spiked in December 2019 to 2.8% y-o-y, from 2.2% y-o-y in November 2019. Accordingly, Fitch Solutions is revising its 2020 average inflation forecast to 5.7%, up from 3.5% previously, which on top of reflecting view for elevated inflation to persist, also reflects expectation for inflation to overshoot the SBV’s 4.0% limit, limiting scope for monetary easing.

That said, Fitch Solutions still sees scope for the SBV to adopt targeted loosening measures to boost growth of its priority sectors, given slowing growth in the export manufacturing sector, which it believes to be due to infrastructure and human capital constraints.

Risks to its view are towards monetary tightening and slower credit growth. While the latest stance by the SBV as of December 2019 was for monetary easing to support growth, surging inflationary pressures could see it alter its stance to instead focus on curbing excessive inflation.

This could see the central bank tighten policy either broadly through its benchmark interest rates, or through sector-specific measures. Higher interest rates could see credit growth continue to decelerate, given also rising operating costs due to a shortage of adequately skilled labour, which reduce the profitability of new business undertakings.

Hoai An