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Vietnam’s weekly financial - monetary update (Week 6 – 2021)

Vietnam’s weekly financial - monetary update (Week 6 – 2021)

Wednesday 10, 02 2021

Vietnam’s macro-economic overview

With a GDP growth rate of 2.91%, Vietnam is one of the fastest growing economies in the world in 2020. In particular, agriculture, forestry and fishery sector increased by 4.69%; industrial and construction sector increased by 5.60%; service sector increased by 4.29. Although this is the lowest growth rate between 2011 and 2020, this result is very remarkable and has been highly appreciated by many financial institutions. 

Vietnam’s macro-economic overview

In 2020, along with the negative impacts of the Covid-19 epidemic and the increasing trade protectionism of many countries around the world, Vietnam's economy was also significantly affected by African hog cholera, natural disasters, droughts, storms, floods, landslides, which caused a lot of challenges and difficulties to people and businesses.  However, thanks to the effort of the Government in controlling the pandemic, the timely and flexible economic policies, and the EVFTA, which took effect from August 1, 2020, the GDP growth rate of 2.91% was achieved.  

In addition, the Vietnamese economy also achieved very positive results in trade, with the trade surplus in 2020 reaching a record high of 19.95 billion USD, while the total export turnover still reached the set target with a growth rate of 7% compared to 2019. In the financial sector, the exchange rate continued to be stable, while the deposit and lending interest rates decreased. The continued inflows of foreign investment into Vietnam, combined with a surge in merchandise exports, offset a decline in foreign currency due to weakening tourism and narrowing remittances.

In 2021, Vietnam's economy will continue to be supported by the stable macroeconomy, the persistent FDI inflows and the advantages from the effective FTAs. However, achieving or exceeding the 6.5% growth rate still depends heavily on whether or not the Covid-19 is well-controlled by other trade partners.

Financial - monetary situation and forecasts

Credit growth

In 2020, Vietnam’s credit growth rate was 12.13%. There was a strong differentiation in credit growth among banks. It is said that the State Bank has made two major changes in credit management.

Firstly, the State Bank will temporarily assign the credit growth limit in the first quarter of the year so that banks can follow closely while the target for 2021 has not yet been set. This means the State Bank is still granting annual credit limits to commercial banks.
Secondly, the State Bank of Vietnam usually uses the credit growth figure on December 31st of the previous year to assign credit growth target for the next year. However, the credit growth limit for this year will be closer to reality and based on the average growth.

Exchange rate

The State Bank has decided to stop listing spot rates and stop buying foreign currencies for spot from December 31, 2020. From January 4, 2021, the State Bank purchased foreign currencies for a 6-month term with 23,125 VND / USD. This price level is considered the lower stop for USD / VND exchange rate on the interbank market. 

Exchange rate

That the State Bank stops buying foreign currency for spot shows the efforts of the policy regulators to respond to accusations of currency manipulation from the US. 

Experts believe that it is likely that Vietnam will no longer be on the list of currency manipulation labels under US President Joe Biden. Therefore, the State Bank should consider adjusting the foreign currency buying policy to facilitate operations on the foreign exchange market, and at the same time continue to increase foreign exchange reserves so that they can actively intervene in the market when necessary. The International Monetary Fund (IFM) said that Vietnam needs to continue consolidating foreign exchange in the context of a lot of risks in the international market.

It is forecasted that in 2021, the USD / VND exchange rate will generally be stable thanks to the abundant supply of foreign currencies, and the weak demand in the first quarter of 2021 due to the complicated Covid-19 epidemic.

Interest rates

In the context of ample liquidity of the banking system and low demand for capital, lending interest rates are forecasted to decrease by 0.05-0.16 percentage points in the first quarter of 2021.

Survey on business trends in the first quarter of 2021 for all credit institutions and foreign bank branches in Vietnam, conducted by the Statistics Forecasting Department (the State Bank) shows that the liquidity of the whole system is expected to be in a good state in the first quarter and the whole year 2021, which is the basis for the expectation that credit will recover strongly after the Covid-19 pandemic.

Credit growth is also expected to increase this year, with an increase of 12-14% when the IIP (index of industrial production) and PMI (procurement management index) all show that production activities has recovered. In particular, credit is expected to increase rapidly in the second half of 2021 on the assumption that Covid-19 vaccine is widely distributed in many countries, creating conditions for the global economic recovery.

The survey results also indicate that the overall profit growth rate of 2020 is lower than that of 2019 due to the negative impact from the Covid-19 pandemic, and the fact that credit institution system has actively reduced average prices of products and services to support people and businesses. It is expected that by the end of 2021, most credit institutions will have better profit before tax compared to 2020.

The State Bank has granted credit growth limit for the first quarter of 2021 at 3-4% compared to the end of 2019. According to statistics, credit growth in previous years was normally very low in the first month of the year. Therefore, the liquidity of commercial banks is still redundant, deposit interest rates and interbank interest rates will remain stable, and lending rates are expected to decrease slightly for prioritized industries first quarter of 2021.

According to the State Bank, the interest rate level decreased significantly in 2020 and is expected to decrease slightly in the first quarter of 2021, with the expected average decrease of 0.05-0.16 percentage points compared to the end of 2020.

In general, the money market for 2021 is forecasted to be affected by the complicated epidemic situation. In order to stabilize the domestic money market, the State Bank will govern monetary policy in general and foreign exchange policy in particular by closely following macroeconomic developments, and monetary conditions. Accordingly, the State Bank will firmly hold the view of flexible exchange rate management, which is in line with the domestic and foreign market situation, macro and monetary balances and monetary policy objectives; increase foreign exchange reserves when market conditions are favorable.

Source: Ministry of Industry and Trade
Compiled by VietnamCredit

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