Research Center

Vietnam’s economy is foreseeing a clear path into contraction under the impact of Delta’s outbreak. Production is put into a puzzle with the “three on the spot” requirement with most industries running far below full capacity, while domestic spending has come to a standstill aside from essential purchases during a lockdown. Furthermore, a risk of export orders shifting to competitors is becoming inevitable if a broken supply chain is not fixed. A key solution for all is when the government opens the re-opening stage.

Current developments of the fixed-income markets are closely attached to increasingly abundant liquidity conditions in the banking system. Interbank rates are hitting their several-month lows since 2Q21, while government bond yields are in a free fall to new record lows. As long as credit activity remains subdued and the economy is still dealing with stagnation, a prolonged period of low rates continues to stay in place in the fixed-income markets.

Vietnam’s fast-growing economy is reversing towards contraction territory shortly after 2 months of Delta’s variant impact. A long period of growth in export and industrial sectors has abruptly ended in August, while the services sector is almost completely locked down with current mobility restrictions. Whether it is a temporary disruption or a potential recession depends on an answer of when the government brings the outbreak under control.

More easing banking liquidity conditions helped drive interbank rates and government bond yields to be lower in July, in which G-bond yields were nearing their record lows. Looking forward to August, in the context that credit demand is weakening due to subdued economic conditions and VND supply is increasing, this would be a favorable environment for fixed-income markets. Given those developments, we expect long-term yields to hit their new record lows.

The ongoing Delta outbreak makes Vietnam's economic picture more gloomy, as both domestic and export demand are under its severe impact. The retailing sector is partly disrupted due to current strict social-distancing curbs, while trade recovery is facing more uncertainties with several export markets also being hit by the Delta variant. From our view, economic conditions will become more and more worsening if the economy keeps staying in lockdown.

The current domestic economic outlook becomes gloomy when the government applies stricter measures to deal with the current outbreak. Domestic consumption retreated further under a short-term disruption in the services sector, and CPI became more volatile due to the temporary shortage of essential goods. Export demand is among a few drivers for economic growth in this quarter with our expectation of successful re-opening the economies from our major trading partners. The industrial sector is also in expansion territory thanks to strong growths in export demand-driven industries.

Fast-increasing demand for government bonds took the spotlight in the fixed-income markets in June with medium-term and long-term yields again testing their record lows. However, July would bring a new story to the FI markets. A new wave of huge VND inflows back into the banking system, via USD-purchasing forwards and incoming support envelope, would likely change the current interest-rate environment to be lower. Short-term interest rates and bond yields are expected to see the very first changes.

Economic growth in the second quarter, thanks to a low-base effect from last year, is considered a key driver for an ambitious growth target in 2021. However, a scenario of a 2Q21’s high-growth performance has been cast aside with the COVID-19 resurgence. The services area is getting the hardest hit this time with strictly social-distancing measures, while the industrial sector faces short-term disruptions in some key industries. Besides, an external driver like export is also slowing down in 2Q21. Looking ahead, a rough start for the rest of 2021 is just beginning.

In May, improved credit activity helped create tightening pressure on the banking system's liquidity, resulted in higher short-term interest-rate conditions in the interbank and G-bond markets. Looking forward to June, under uncertain business conditions unfavorable for credit growth, we expect the pressure on the banking liquidity to be loosened in June. Furthermore, State Treasury short-term deposits, which have launched in early June, would also enhance the liquidity conditions and lower short-term interest rates and yields.