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Vietnam’s central bank may cut interest rates further: UOB

The Saigon Times

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HCMC – United Overseas Bank (UOB) in Vietnam expects the State Bank of Vietnam (SBV) to cut interest rates by another 100 basis points to 3.5% in the fourth quarter.

The expected rate cut would help strike a balance between fueling economic growth and easing inflationary pressure, according to UOB’s report on the market outlook released yesterday (September 25).

Vietnam started the year with a slower pace of economic growth, registering a gross domestic product (GDP) increase of a mere 3.28% in the first quarter, down from the 5.92% rise in the fourth quarter of 2022.

Low external demand and slack manufacturing were the primary causes. Consequently, the second quarter saw the economy expanding a slight 4.14%, leading to growth of 3.72% in the first half of the year, way below the 6.46% recorded in the same period in 2022.

The manufacturing sector, accounting for about 34% of Vietnam’s GDP, grew by a mere 1.1% year-on-year in the April-June period. In contrast, the services sector, which contributes 43% to GDP, demonstrated stronger resilience, with a 6.1% increase. Manufacturing contributed more than 60% of the overall economic growth in the first half this year.

Vietnam’s Purchasing Managers’ Index (PMI) rebounded above 50 in August, after a five-month decline. However, it lagged behind the ASEAN regional average for the twelfth consecutive month.

Vietnamese exports, heavily affected by weakened external demand, decreased for nine of the past ten months. Notably, exports to the U.S., its largest market which accounts for 28% of Vietnam’s total export value, contracted by 9.4% in August 2023.

Retail sales remained robust, with a 10% increase in August 2023, compared to the same month last year. Moreover, over 7.8 million tourists had visited Vietnam in the year to the end of August, signaling the potential recovery to at least two-thirds of the 2019 levels by the end of 2023.

However, Vietnam’s GDP growth for the third quarter may not inspire strong optimism, as the services sector only partially offsets sluggish growth in exports and manufacturing. UOB experts maintain an annual growth forecast of 5.2% for 2023 and 6.0% for 2024.

“We anticipate a growth rate of 5.6% in the third quarter and 7.6% in the fourth quarter. External risk factors that warrant close monitoring include the Russia-Ukraine conflict and its impact on energy, food and commodity prices, as well as disruptions in global supply chains and China’s economic recovery rate,” said UOB specialists.

On the inflation front, the consumer price index (CPI) is below the target of 4.5%. However, a recovery in the headline CPI in the last two months, following a six-month downtrend (with August seeing a 2.96% year-on-year increase), indicates persisting inflationary pressure. It is particularly concerning given recent crude oil price hikes.

“From January to August, the overall inflation rate in Vietnam increased about 3.1% year-on-year, higher than the 2.6% seen in the same period last year. We foresee rising inflationary risks for the year,” said UOB experts.

Amid these economic challenges, the SBV responded swiftly by cutting its re-financing rate by 150 basis points to 4.5% in June. “However, we still anticipate a further 100 basis-point cut to 3.5%, but the timeframe has been pushed to the final quarter to balance growth and inflationary pressures,” the experts projected.

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