An investor watches electronic stock boards at a securities company. The 20% surge in the VN-Index for the year as of August 8 has been largely driven by a circa 150bp fall in banks deposit rates. Illustrative image (Source: VNA) In a recent note, he said the State Bank of Vietnam had cut policy interestrates four times this year -- the refinancing rate by 150 basis points to 4.5%-- in stark contrast to its US counterpart, which has hiked rates four times,by 100bps to 5.5%.
It also took other measures to boost growth,which fell to just 3.7% in the first half of this year from 6.4% a yearearlier.
These policy rate cuts prompted banks to lowertheir deposit and lending rates, which helped boost the VN-Index by over 20%for the year as of August 8.
“We expect a sharp recovery in both GDP growth and earnings growth next year topropel stock prices even higher. That said, we do not expect the SBV’s monetaryeasing will have much of an impact on 2023 GDP growth because banks arecurrently hesitant to extend loans, and because higher interest rates are notthe main source of Việt Nam’s slow economy this year.”
The aggressive policy rate cuts come at a time when the US and the EU are stillraising interest rates.
A widening gap between interest rates in Vietnam and in the US has put somedepreciation pressure on the USD-VND exchange rate, but that depreciationpressure has been mitigated by a stunning improvement in the country’s tradesurplus from zero in 2022 to 6% of GDP in 2023, according to the economist.
This surplus, coupled with FDI inflows of over 4% of GDP in the first sevenmonths, helped support the đồng, enabling the SBV to cut interestrates while maintaining a remarkably stable exchange rate.
Impact of lower rates on stock, property markets.
The VN-Index is up because people have been taking money out of banks andploughing it into the stock market as their six-month deposits mature andbecause the market was oversold last year.
The increase has been driven by a 30% surge in bank share prices and a 20%increase in the prices of real estate stocks.
The heavy weighting of these sectors in the VN-Index (at 35% and 18%respectively) means the increase in their share prices drove over two-thirds ofthe increase in the index.
“The improvement in sentiment towards bank share prices stems from investors’reduced concerns about asset quality issues and expectations for higher creditgrowth in H2, prompted by lower interest rates," the economist said.
“But it is important to note that declines in lending rates by banks are notuniform, especially given the liquidity issues mentioned above, which areparticularly acute at some smaller banks.”
Lower interest rates boosted sentiment in the real estate market, wheretransactions are starting to pick up again, partly because mortgage ratesdropped by more than 50bps at many banks over the last month.
“We expect another 50-100bp decline in mortgage rates over the next six to 12months and note that the improved sentiment in the real estate market has, notsurprisingly, boosted the sentiment towards major real estate stocks as well astowards the beneficiaries of higher real estate development activity(construction companies, steel companies, etc.).
“Finally, we expect a sharp pick-up in earnings growth in 2024, which meansthat the stock market recovery, which has been driven by lower interest ratesin 2023, will likely be sustained by higher earnings in 2023, as well as by themarket’s current, attractive valuations.
“The VN-Index’s FY23 P/E ratio is currently 30% below its average over the lastfive years, and more than 10% below that of Vietnam’s regional peers.”/.
VNA
