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Vietnam - Central bank plays it coy over interest rates

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Vietnam - Central bank plays it coy over interest rates Empty Vietnam - Central bank plays it coy over interest rates

Post by lexie Mon Dec 05, 2011 10:48 am

December 5, 2011

Central bank plays it coy over interest rates

Rumors are spreading that the cap on deposit interest rates may fall to 12 per cent per annum from the current 14 per cent, but at a regular meeting of the Government last Thursday, State Bank Deputy Governor Nguyen Dong Tien neither confirmed nor rejected it.

Tien, however, said that inflation was still at a high level but on the decline, which together with the target of reducing inflation to single digits next year would serve as the foundation for a gradual cut in the interest rate. He also said how deep the cut would be would require careful consideration so as to ensure the benefit of depositors as well as the ability of banks to attract capital.

Previously, Governor Nguyen Van Binh had announced that the cut will be thought of if inflation in November was less than 1 per cent. The General Statistics Office has said that November's CPI was 0.39 per cent.

Meanwhile, several bankers have said that the slower speed of CPI growth over the past three months, combined with the inflation control target set for 2012, created an opportunity for lowering interest rates. They said lower deposit interest rates would help reduce lending rates to corporate customers, which stand at around 19 per cent a year, that was still high as not many customers could earn the 25 per cent profit needed to afford high borrowing costs.

High interest rates would have a negative impact on the economy in the long term, bankers said. They suggested gradual cut to 13 or 12 per cent to avoid "shocks" that would induce "bad reactions" from the CPI.

They also said that the most important thing was that the State Bank announced a specific plan to reduce deposit interest rates to the public.

Economic outlook sours

In the fourth quarter of 2011, there has been a considerable change in outlook for Viet Nam's economic prospects for the coming year, according to a bi-annual survey results released last week by Grant Thornton Viet Nam. The survey canvassed the opinions of a number of decision makers based in Viet Nam or those having a significant focus on the country, presenting the outlook of investors about the private equity sector. Negative sentiment towards Viet Nam's economy increased significantly to 51 per cent from 21 per cent in Q2, while the positive sentiment decreased from 53 per cent in Q2 to 17 per cent as a reflection of continued macroeconomic problems, particularly high inflation and high interest rates.

The growing pessimism has seen the attractiveness of Viet Nam as an investment destination fall to the lowest level in the last five surveys.

The percentage of respondents who plan to increase their allocation to Viet Nam decreased considerably from 53 per cent previously to 29 per cent.

Bill Hutchison, the firm's advisory services partner, said: "As the private sector contributed nearly half the GDP in Viet Nam in 2010 and has continually increased its contribution, it was unsurprising that investors consider this sector as the most significant source of deals. However, the sombre business outlook as confidence wanes is causing investors to bide their time at the moment."

Extremely high interest rates in Q2 and Q3 led to an increase in the number of distressed assets, especially in the real estate/ property sector. However it is somewhat surprising that real estate has taken the position of the most attractive sector for investment overtaking education, which was ranked as the most attractive industry for private equity investment in the previous survey conducted in Q2. However the survey also indicated that almost the same number of respondents rated the real estate sector as the least attractive.

More than 50 per cent of respondents expected that hands-on involvement in portfolio companies would increase. "Vietnamese private and family-owned companies, a key source of deals for private equity in the next 12 months, currently contain weaknesses in their corporate governance, and need to effectively implement restructuring as well as develop strategic planning. In order to maximise value, an increased level of hands-on involvement is, therefore, a requirement of PE investors to enable portfolio companies to improve their corporate governance, and make them more sophisticated and able to achieve sustainable growth," said Rizwan Khan, senior manager of business risk services.

More than half of the survey respondents also believed that the number of exits (from investments) would increase, whilst only 16 per cent thought that they would decrease.

Insurers see solid growth

The insurance market, both life and non-life sectors, posted good growth rates in the year's first nine months of 2011, with the former growing 24 per cent year-on-year in turnover to reach VND15.4 trillion (US$733 million) and the latter earning almost VND3.8 trillion from new policies alone, up 28 per cent. In the first nine months of this year, almost 621,000 new contracts were signed with Prudential taking the lead, representing almost 221,000, followed by Bao Viet Life with 109,000 and Manulife with 67,600.

The total outstanding liability of the life insurance companies stood atVND434 trillion, up 27 per cent.

By the end of September, there were more than 195,000 people working as insurance agent, a rise of 22 per cent from the same period in 2010, with Prudential, Bao Viet Life and Dai-ichi topping the list accounting for 97,560, 24,220 and 16,660, respectively.

In the non-life sector the motor vehicle service took the largest share in the total premium turnover at almost VND4.6 trillion, up 18 per cent. Of the total motor vehicle turnover, Bao Viet Insurance led the pack with over VND1.1 trillion.

Property insurance ranked second in turnover with VND4.18 trillion, showing a rise of 28 per cent. Personal accident and health insurance gained a turnover of VND2.3 trillion, up 37 per cent.

The Association of Vietnamese Insurers (AVI) commented the growth rates of the insurance market were positive given that many businesses were facing difficulties, especially with high inflation.


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