Vietnam rate cuts seen likely in anemic economy

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Vietnam's flagging economy and slowing inflation has prompted strategists to forecast more interest-rate cuts, which have already driven government bond yields to the lowest in four years.

Six of nine economists and bond traders surveyed by Bloomberg News expect a reduction in the central bank's repurchase rate of 50 basis points by the end of the third quarter. The yield on the five-year sovereign notes will reach 8 percent by year-end from 8.55 percent yesterday, according to three of the nine, while three forecast a drop of 15 to 40 basis points, and the remaining three said the yield would stay at the current level or increase.

Stabilization policies designed to slow inflation and avert a macroeconomic crisis have led to "anemic" demand for loans, according to the World Bank, which this month lowered its 2013 economic growth forecast to 5.2 percent from 5.5 percent. Vietnam's inflation rate slowed to 6.61 percent in April, the least in seven months and below the estimates of all six economists surveyed by Bloomberg News.

"Conditions for the bond market have improved significantly over the last 18 months," Tareq Muhmood, the Ho Chi Minh City-based Vietnam chief executive for Australia & New Zealand Banking Group Ltd., said in an interview yesterday. "There's a lot of liquidity in the government bond market and a lot of interest."

"˜Highly active'

Vietnam's central bank cut the repurchase rate to 6.5 percent from 14 percent at the beginning of 2012, while lowering the refinancing rate to 8 percent from 15 percent, with the latest reduction taking place in March. The economy, which expanded at the slowest pace in 13 years in 2012, grew 4.89 percent in the first quarter, compared with 5.44 percent in the previous three months, official data show. That curbed demand for loans, leaving banks with cash to park in bonds.

The yield on the benchmark five-year Vietnamese government bonds has fallen four percentage points since the end of 2011, before the rate-cutting cycle began. That compares with a drop of 2.16 percentage points to 2.93 percent for similar-maturity Philippine bonds over the same period, and a decline of 0.52 percentage point to 4.92 percent for Indonesian securities.

Vietnam's primary bond market was "highly active" in March, according to a research note released this month by VinaCapital Group, the country's biggest fund manager. The five- year yield may fall to around 8 percent in the next three months, said Roy Fong, the Ho Chi Minh City-based director of fixed- income at VinaWealth Fund Management Joint-Stock Co., part of VinaCapital.

Banking problems

"Banks are booking a lot of their investment these days in bonds," he said in an interview yesterday. "There's a possibility that rates will be cut further because of the inflation figure. With the banking system's situation, bond yields will probably continue to trend down."

Vietnam's "opaque" banking sector poses a risk to the country's macro-financial stability and to public finances, according to Fitch Ratings Ltd., which in January gave a "base- case" estimate for the potential cost of recapitalizing the nation's banks at about 10 percent of 2012 GDP.

Vietnam's credit growth last year was an "anemic" 9 percent, less than an earlier target of 15 percent, spurring central bank rate cuts, according to the World Bank. Loans increased 0.03 percent this year through March 21, the government said on April 3.

"If there isn't strong demand for credit, an alternative is to buy bonds," ANZ's Muhmood said. "Banks have historically lent to real estate or state companies, but demand in both of those markets is significantly less than what it was before."

"˜Not convinced'

The dong has weakened 0.5 percent to 20,938 per dollar this year, according to data compiled by Bloomberg. That compares with an 0.8 percent decline to 9,717 for Indonesia's rupiah, a 0.5 percent drop to 41.262 for the Philippine peso, an 0.7 percent gain to 3.0468 for Malaysia's ringgit, and a 5.1 percent rally to 29.1 for Thailand's baht.

Consumer-price gains in Vietnam reached 23 percent in August 2011, nine percentage points higher than the central bank's repurchase rate at the time, official data show.

"We are not convinced inflation is set for a sustained downtrend," Vishnu Varathan, a Singapore-based economist at Mizuho Corporate Bank Ltd., wrote in a research note. "Further rate cuts will probably accentuate the risks of resuming negative real interest rates" and the dong could also be destabilized, he wrote.

Struggling economy

The cost to insure Vietnam's five-year bonds against default using credit-default swaps fell 102 basis points in the past year to 205, the biggest decline in Southeast Asia, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That compares with drops of 33 basis points to 140 for Indonesian debt and 55 basis points to 98 in the Philippines.

"It is still a good time to buy bonds," Nguyen Duy Phong, an analyst at Viet Capital Securities in Ho Chi Minh City, said in an interview yesterday. "The bond market will continue to grow strongly, as the need for government financing is still high."

With an ailing economy "stemming from an impaired banking system and a deleveraging state-owned enterprise sector," Vietnam's central bank will probably cut policy rates another 100 basis points this year, according to Matt Hildebrandt, a Singapore-based economist at JPMorgan Chase & Co.

"The SBV might wait a few months, but they'll almost certainly cut again," he said in an April 24 interview. "The economy is struggling."

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