Vietnam~ Institutional investors keep cautious about interest rate reductions

September 9, 2011


Institutional investors keep cautious about interest rate reductions


Some investment institutions believe that the interest rates would not go down sharply, while they have also warned about the possible risks to occur when the interest rates fell too rapidly.




While officials feel elated when talking about the interest rate reduction trend, businesses keep placid, while institutional investors keep cautious.


The awaited meeting between the State Bank of Vietnam and 12 big banks late last week has provided some more information to the market. The most important outcome of the meeting is that big commercial banks have promised to ease the interest rates. However, this remains just a promise.


Supposing that at the meeting, commercial banks reached an agreement about how much to ease interest rates, analysts believe, the agreement would not have much significance, and that the agreement may not be strictly followed in reality. In the past, commercial banks many times reached consensus about the interest rates that should be applied. However, the commitment was broken just a couple of weeks later.


Before the above said meeting took place, the Ban Viet Securities Company (VCSC) released a report on the monetary market which said “it is still too early to celebrate victory” when mentioning the interest rate reductions.


VCSC believes that the solutions put forward by the Governor of the State Bank of Vietnam recently would be able to help ease the interest rates by another 1-1.5 percent per annum, much lower than the expected reductions of 3-4 percent per annum.


“At this moment, the dong negotiable deposit interest rates could be up to 17-20 percent, though the ceiling deposit interest rate is 14 percent as stipulated by the State Bank, while the lending interest rates are as high as 20-22 percent per annum,” the VCSC’s report reads.


“The current interest rates represent the considerable decreases in interest rates from the peak levels of 19-21 and 22-24 percent, respectively, in June. This means that the situation has been improved, but it is still too early to celebrate victory,” the report continues.


The HCM City Securities Company (HSC) also keeps cautious when commenting about the interest rate reductions. The company’s recently released report said that though banks are expected to ease the lending interest rates by 0.5-1 percent per annum, it is obvious that the central bank has no much more space for free exercise of the monetary policies.


The Thang Long Securities Company TLS, also a big investment institution, believes that the interest rates would not decrease significantly in the immediate time. Meanwhile, TLS has warned that the problem of the hard pressure on the dong/dollar exchange rate has emerged more clearly for now.


The HSC’s report also mentioned the pressure on the exchange rate, once the dong interest rates are forced to go down.


The interest rates will surely go down, but they will only decrease slightly and go in accordance with the consumer price index increases. And if the lending interest rates are forced to go down too sharply and rapidly, a risk may occur that the capital flow, which had been injected by speculators to enjoy the gap between the dong and the dollar interest rates, would be reversed. If so, this would put a hard pressure on the exchange rate and cause long term uncertainties in the macro economy.


Meanwhile, BIDV Securities Company BSC keeps optimistic when looking at the pressure on the dong/dollar exchange rate.


“The dong/dollar exchange rate tends to increase recently, and the pressure on the exchange rate proves to be not a surprise at all. We believe that there is no foundation for the exchange rate to fluctuate heavily in the near future,” BSC’s report reads.


In principle, the interest rate reductions would make the dollar price increase again, since people find dollars more attractive and try to keep dollars (previously, people preferred keeping dong and depositing dong at banks to enjoy high interest rates). However, BSC does not think that the interest rates would go down too sharply, which means that the pressure on the exchange rate would not be too hard.


Late last week, local newspapers reported that some banks sold dollars at the prices which were 200-300 dong per dollar higher than the ceiling levels.


http://www.vietfinancenews.com/2011/09/institutional-investors-keep-cautious.html