l Global Research l Economic Alert 01:45 GMT 15 May 2013 Vietnam SBV maintains pro-growth bias SBV cuts policy rates by 100bps, lowering the refinancing rate to 7% We expect one more 50bps cut in Q3 if the authorities remain comfortable with inflation We adjust our inflation forecasts for 2013 and 2014; we still see inflation on an uptrend Decisively pushing through structural reforms remains critical to the country s recovery We are constructive on Vietnam Government Bonds on easing CPI inflation and credit growth Summary The State Bank of Vietnam (SBV) cut the refinancing rate to 7.0% from 8.0%, effective on 13 May 2013. The announcement came on the back of easing inflation pressure and sluggish economic growth at the beginning of 2013. This is the eighth rate cut in the current easing cycle (800bps in total) and the second cut this year. We see a possibility of another rate cut of 50bps in Q3 if the authorities remain comfortable with the inflation outlook and credit growth stays anaemic. The SBV is also likely to reduce the cap on the deposit rate further if it judges that the recovery in business activity is too slow. Betty Rui Wang, +852 3983 8564 Betty-Rui.Wang@sc.com Jennifer Kusuma, +65 6596 8250 Jennifer.Kusuma@sc.com Edward Lee, +65 6596 8252 Lee.Wee-Kok@sc.com We lower our 2013 inflation forecast and raise our 2014 forecast to reflect the expected delay in the return of inflationary pressure. We now expect CPI inflation to average 7.2% in 2013 and 8.2% in 2014, versus our previous forecasts of 8.0% and 6.0%, respectively. In early May, the National Financial Supervisory Commission suggested that the government prioritise growth for the rest of 2013. Indeed, economic data for the first four months of the year suggests a slow start. Some people regard high interest rates as the key hurdle to Vietnam s economic recovery. However, in our view, accelerating the pace of structural reforms (including in the banking and SOE sectors) and reviving the property market are more important than monetary easing to boost business activity and boost growth momentum. research.standardchartered.com
We adjust our CPI inflation forecasts, maintaining our view of an upward trajectory Inflation and credit growth are key to watch Inflation outlook Benign inflation has given the SBV leeway to cut policy rates this year. The SBV cut the refinancing rate by 100bps in March, immediately after the release of below-7% inflation for March. In April, headline CPI Inflation stabilised at 6.6% y/y, easing from 6.9% in Q1 (quarterly average). Core inflation also edged lower to 11.6% y/y from 12.0%. Our seasonally adjusted data suggests that the m/m inflation rate turned negative in April for the first time since April 2010. We now expect inflation risks to re-emerge later than we had previously forecast. We therefore revise down our 2013 inflation forecast to 7.2% from 8.0%, but raise our 2014 forecast to 8.2% from 6.0%. We have not changed our view of the inflation trajectory. We expect inflation to remain on an uptrend and inflation risks to return in Q4-2013 amid higher food prices, rising energy prices and minimum wage hikes. We forecast that headline CPI inflation will reach 8.0% y/y by the end of the year. Lowering policy rates is not a panacea Credit growth We believe that still-slow credit growth is another trigger for the latest round of rate cuts. Credit growth was only 1.4% for the period from end-2012 to April 2013. Although this was higher than the level as of March, credit growth is still short of the Government s 12% target for 2013. High interest rates may be the reason for sluggish credit uptake. However, whether lower interest rate will translate into lower funding costs and boost bank lending remains to be seen. Lower policy rates may not lead directly to a reduction in banks funding costs given the small size of outstanding refinancing compared with bank lending. More importantly, lower funding costs do not necessarily result in higher credit growth. Flush liquidity on the ground suggests that a lack in confidence in banks governance and ability to resolve non-performing loans (NPLs) may be a bigger impediment to credit growth. Accelerating structural reforms is more important to the country s economic recovery than monetary easing Policy assessment The SBV has implemented several measures since 2012 to offset economic headwinds and boost domestic business activity, with varying degrees of effectiveness. It has slashed the key policy rate (the refinancing rate) by 800bps since March 2012, cut the open-market operation (OMO) rate to 6% from 14% in October 2012, and lowered the cap on deposits to 7.5% now from 14% at the beginning of 2012. The SBV is also considering capping the lending rate to spur loan demand (current lending rates for priority sectors are 9-12%, while lending rates are typically 11-15%). On the fiscal policy side, the government plans to cut the corporate income tax rate to 22% from 25% in July 2013. All of these measures are likely to help businesses to some extent. However, sluggish lending growth is also a result of banks concerns about their balance sheets and borrowers concerns about the economic outlook. Clearing these impediments will require decisive structural reforms. Progress on such reforms has been slow this year. The IMF recently cut its 2013 GDP growth forecast for Vietnam to 5.2% from 5.8%, signalling the importance of following through on reforms. The establishment of an asset management company (AMC), which aims to resolve NPLs in the banking sector, had been delayed twice since March. The prime minister signed the decree to create the AMC on 21 May, which might bring some relief to the market. Restructuring the SOE sector and reviving the real-estate market will also be key to achieving sustainable growth in the longer run. The government plans to unveil a master plan for SOE reform in June and will provide a VND 30tn package to home buyers to support the property market, although details on these initiatives are lacking. GR13AP 15 May 2013 2
Rates outlook VGBs to rally on easing CPI inflation, credit growth We have a constructive outlook on Vietnam Government Bonds (VGB). The SBV has turned more dovish than we previously expected amid easing inflation and weak credit growth. We expect the SBV to lower the refinancing (refi) rate by another 50bps to 6.5% in Q3-2013. CPI inflation slowed to 6.61% y/y in April from 6.64% in March (market consensus: 6.95%), and we now expect inflation to average 7.2% y/y in 2013, down from our previous 8% forecast. The 2Y VGB is trading at a positive spread to the refi rate, and we expect the spread to narrow Banks funding rates from interbank borrowing, consumer deposits and OMOs are likely to stay low The 2Y VGB yield had traded below the refi rate from February 2011 (when the refi rate became the main policy rate, replacing the base policy rate) to 10 May, when the SBV cut the refi rate by 100bps to 7%. The cut was larger than the market consensus of 50bps, and the 2Y VGB yield, at 7.2%, is now trading at a positive spread to the refi rate. We expect this spread to narrow, given that the refi facility is tapped by banks in need of liquidity assistance and the interest rate therefore carries a premium to reflect borrowers distressed conditions. Bank demand is the key source of support for VGBs. Demand should remain robust, as we expect interest rates on banks liabilities to ease alongside the refi rate. The refi facility is just one of banks funding sources and may not fully represent their funding rates. We therefore consider three key liabilities of onshore banks interbank borrowing, consumer deposits and the SBV s reverse repurchase facility via OMOs and find that VGBs still offer some yield pick-up over banks liabilities. The overnight interbank lending rate, while volatile, has been offered at 2-4% in the past six months, or a 400-500bps spread below the 2Y VGB yield. Interbank liquidity has remained flush since 2012, in line with slowing credit growth. Following the reverse repo rate cut to 6% from 6.5% on 13 May, the 2Y VGB offers an attractive 120bps pick-up over the reverse repo rate. The interest rate cap for short-term consumer deposits is currently at 7.5%, down from 8% in March. We see scope for the ceiling rate to be lowered further given the benign near-term inflation outlook. The deposit ceiling rate is one of the most effective ways to regulate consumer lending rates, as consumer deposits account for the majority of banks liabilities. The government s funding position is comfortable, at 59% of total requirements as of April Supply risk is minimal, as the government s funding position is well above its run rate. On 9 May, Bloomberg quoted the Ministry of Finance as saying that fund raising from VGBs and T-bills as of end-april amounted to VND 89tn, or about 59% of total 2013 gross funding requirements from the debt market. (For details on the composition of VGB supply and the supply outlook, see the Vietnam section of Standard Chartered Asia Focus, 13 March 2013, Transforming, rebalancing, outperforming.) We expect the 1Y-3Y segment, the most actively traded, to outperform along the curve and VGBs to rally with a bull-flattening bias. We now expect the 2Y yield to bottom at 6.5%, versus 7.2% currently and our previous forecast of 7.7%. A pick-up in inflation in H2-2013 would limit the scope of the rally, as depressed real yields would slow banks demand for VGBs. Global investors should also take into account transaction costs and FX risks when investing in VGBs. We expect the SBV to tolerate a 2-3% depreciation in the Vietnamese dong (VND) in 2013, and forecast USD-VND at 21,000 by Q4-2013. GR13AP 15 May 2013 3
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