State Bank of Vietnam Policy rate (Dec): dropping like a stone

General Press Releases Monday December 22, 2008 11:37
State Bank--22 Dec--Asian Banker

State Bank of Vietnam (SBV) has continued with its recent frequency of cutting policy rates every 2 weeks - 20th Oct, 3rd Nov, 20th Nov, 2nd Dec and today (19th Dec). This time around however the bank did't think 100bps was enough and slashed the base rate by 150bps, probably getting some inspiration from central banks around the world, to 8.5% (effective 22nd Dec) compared to a peak of 14%. As a result the cap on the lending rate (150% of base rate) has now come down to 12.75% from a high of 21%. The central bank has now unwound nearly all of the policy tightening having cut rates by a cumulative 550bps against total hikes of 575bps earlier in the year. In terms of rate outlook, we were expecting the low to be 7.5% in Q1 2009, the risks however seem biased to the downside. The central bank cut the re-financing and discount rate by 150bps taking them to 9.5% and 7.5%, from a peak of 15% and 13% respectively. Given that the central bank announced yesterday that Vietnam will gradually move to a proper interest rate corridor with the re-financing rate serving as the ceiling and the discount rate as the floor, we think more rate cuts are likely so as to reduce the gap with the over night rates. Note that the inter-bank over night rate is currently trading at around 6.5%.

The central bank also cut the Reserve Requirement Ratio by 100bps to 5% releasing VND 10-15trn into the domestic banking system. However this is less aggressive than the previous two meetings where it cut the RRR by 200bps each time. This we think is on account of the fact that liquidity is ample as evidenced by low overnight interbank rates. At the same time SBV also cut the interest paid on reserves to 8.5% from 9% previously, which should help reduce the government's interest rate costs.

The central bank's ultimate aim is to get credit to corporates. It has been trying to achieve this by reducing the cap on lending interest rates and also boosting liquidity (RRR cuts etc) in the banking system in the hope that banks will lend this money out to corporates. The policy on boosting liquidity hasn't been that successful in getting credit to corporates as banks simply don't have the appetite to take on risk and just want to preserve capital. In this regard it is interesting to note that although the central bank had announced on the 20th of October that it would buy back the VND 20.3trn worth of compulsory Treasury bills from commercial banks, most banks have held on given the attractive yield of 13%. Not anymore! The central bank cut the coupon to 4.5% today in a bid to encourage banks to get out of the T-bill position and start lending. The other point to bear in mind obviously is the demand for loans. We agree that lending interest rates have come down, however firms don't want to take on new loans as well, especially given the decline in new orders coming there way. (December 22 2008)--

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