Research Center

Economic recovery continued gaining momentum in the second month of the reopening with robust growth in trade and industrial sectors taking a spotlight. Furthermore, a marked rebound in the retail sector also caught our eyes. On the other side, inflation was also signaling upward pressure from inflated energy prices, although it remained well-controlled.

A short-lived upward pressure on interest rates, due to high liquidity demand during end-3Q21, was diminishing in October as interbank rates and government bond yields fell back to previously low levels. Looking forward to the remainder of 2021, we remain of our view that monetary conditions continue to be accommodative in the coming months, supported by an easing monetary stance of SBV and weak economic recovery, resulting in a continuation of the declining trend in interest rates.

October macro figures well illustrate that the economic recovery has been more resilient than our expectation in the early reopening. From the supply side, the industrial sector has been through a resilient recovery to surpass a pre-pandemic level. On the demand side, retail sales also rebounded remarkably shortly after easing social-distancing rules, while export demand remained sound and stable. From our view, this is just a start of the successful economic recovery in the fourth quarter.

A period of high liquidity demand in the end-3Q21 ended with little upward pressure on domestic interest rates. In our view, domestic conditions continue to be very accommodative to a low interest-rate environment. Looking forward to October, we expect interbank rates and government bond yields to drop further.

Vietnam's economy witnessed an unprecedented contraction in 3Q21 under several-month hard lockdown. Services businesses are getting the hardest hit from the lockdown, while manufacturers are also facing partial disruption under COVID-containment requirements. However, better-than-expected macro developments in September shed light on sound recovery in the post-crisis.

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.