Interest rates under the pressure of GDP growth

As the first quarter is nearing an end, the State Bank of Vietnam (SBV) has bought a volume of foreign exchange worth billions of U.S. dollars, equal to the total sum of last year, an unprecedented record in a three-month period. The volume of Vietnam dong pumped into the market to buy the greenback since early this year has surpassed the VND100 trillion mark, which forces the central bank to re-open the treasury bill channel to withdraw money. On the Interbank market, overnight interest rate of the dong and other rates applicable to short terms have gone down compared with earlier this year with the overnight rate removed from the annual 4%-5% peak that has been established for months. This rate is ranging between 3.1% and 3.2% per year.

Widening savings rates

Commenting on the real estate market, Nguyen Hoang Minh, vice director of the SBV HCMC Branch, says in recent months, loans extended to realty developers have apparently been slower, which may means estate supplies are going to shrink. Minh says estate firms in HCMC no longer have as many as realty projects as they used. In addition, more stringent ownership transfer procedures which take more time to complete is to a certain extent dampening the estate market.

Although banks have tightened their credit for estate developers and traders, they are still take it easy for individual homeowners. Credit for livelihood, mainly used to own houses to live in, of the entire banking system has amounted to VND1.41 quadrillion, accounting for over 19.5% of the total outstanding debt. It is understandable why banks have favored individual home ownership as this segment is safer than credit for estate developers.

From this standpoint, when banks’ output is focused on individual customers because of higher lending rates, it is more likely that credit institutions will keep their deposit interest rates at the current rates to sustain their capital mobilizing pace. Deposit rates will therefore not be likely to fall.

Bankers say it is not easy for interest rates to drop due to not only difficulties in output but also competition among themselves. Some banks which are still grappled with a high rate of real bad debt and whose credit mostly serves a limited clientele need to have stable input of capital mobilization to ensure their liquidity. They would not therefore cut their deposit rates. The above situation makes the gap of deposits of the same term offered by different banks ever larger. One bank offers an annual 6.5% rate for six-month deposits while another gives a 8% rate. The 1.5% margin is way too big. So, capital will be drawn to banks offering higher rates.

In order not to fall behind in the race for capital mobilization, a host of banks have had to raise their deposit rates. This means interest rates will not go down in the short term.

Possible scenario of a lower rate

Last year, credit growth was merely shy of 14% while public investment failed to disburse all its allocation. However, gross domestic product (GDP) growth soared to 7.08% due to the inflow of foreign direct investment (FDI). This year’s foreign investment sector’s growth, viewed from statistics released by the General Statistics Office, would not be as high as last year. Specifically, the key manufacturing industry, electronics, posted a growth rate of only 5.2% versus 38.3% in the same period last year. Cell phone production fell by 7.6%. This fall was expected as Samsung changed its plan to reduce production in Vietnam. However, other industries—such as mining, motorized vehicle production and textile and garments have sustained a relatively high growth rate. The only exception is agricultural production and agricultural export which generated a slower-than-expected rate.

The GDP rate of the first quarter is projected by the Ministry of Planning and Investment at 6.5%, a rise way below assumption of both the Government and the business circle.