Vietnam lowers ceilings on VND deposits between 0.5-0.8 ppt

The current rate is 7.5%.

According to HSBC Global Research, the central bank will lower the deposit caps as well as the VND/USD mid-point rate effective tomorrow. This reflects efforts by the government to ease credit conditions in Vietnam, although it will likely only have a marginal effect.

Here's more from HSBC:

The economy is still resilient by growing 5% y-o-y in 2Q despite y-t-d credit growth of only 3.31%. But actions to resolve the bad debts in the system are still required. The government hopes the state-run Asset Management Company, expected to commence operations in mid-July, will help push forward the cleanup process.

Facts
- The State Bank of Vietnam announced that it will lower the ceilings on VND deposits between 0.5-0.8 ppt; the current rate is 7.5% for less than six-month deposit for individuals and this will be lowered to 7.0%

- The lower ceilings on USD deposits will be lowered by 0.25-0.70 ppt effective 28 June 2013; the current USD deposit cap is 2.0% and this will be lowered to 1.25% for individuals

- The SBV will also cut the mid-point rate (otherwise known as the reference rate) by 1% to 21,036VND from 20,282VND per USD

- USD/VND transactions are permitted to trade +/-1% around the mid-point rate; the current rate has been kept unchanged since 24 December 2011

- 2Q real GDP growth came in within expectations at 5.0% y-o-y; 1Q growth was revised downward to 4.8% from 4.9%; year-to-date, the economy has expanded 4.9%; the government targets 5.5% growth

Implications
The announcement by the central bank to lower the deposit ceilings on both the VND and USD is reflective of the government's effort to boost lending. The bank hopes that the reduction of the deposit cap will help push lending rate lower, providing some liquidity to the economy.

The latest year-to-date credit growth print stated by the central bank is 3.31%; taking inflation into account, the economy has experienced negative real credit growth. Small and medium enterprises have been particularly hurt since the government implemented Resolution 11 to clamp down on excessive lending to temper inflationary pressures.

While weak credit growth has dampened economic activity in Vietnam, some sectors are holding up quite well. The export-oriented sector, especially manufacturing, has expanded by 16.1% y-t-d (Jan-Jun) despite the global slump and weakened commodity prices.

This has provided some buffer to Vietnam's deleveraging process, which has hurt private and public consumption and investment. The year-to-date trade deficit is only USD1.4bn thanks to weaker demand of consumption imports and resilient electronic exports. FDI inflows rose year-to-date.

The latest headline inflation reading is 6.7% y-o-y in June, slightly up from 6.4% in May. While food and transportation costs are trending downward thanks to low domestic demand and weak commodity prices, service costs are still rising, especially healthcare. This means that core inflation in Vietnam is still elevated, limiting space for the central bank to significantly ease credit conditions.

The reduction of the deposit caps provides a boost to credit growth, but only marginally. Most meaningful are reforms to unload the bad debts in the banking system and improve the efficiency of SOEs. The government announced that it will begin operation of the Asset Management Company to reduce non-performing loans in the system mid-July.

We expect GDP growth to be 5.1% in 2013, much lower than Vietnam's historical average of 7%. However, what's most vital moving forward are the government's actions to develop institutions to manage a growing economy effectively and efficiently. Rapid and sustained economic growth requires a functioning capital market as well as institutions that foster productive enterprises.

Bottom line
The central bank announced a reduction of the deposit caps. It also lowered the mid-point VNDUSD rate by 1% to 21,036. These moves reflect efforts by the government and central bank to stimulate a sluggish economy, dragged down by weak credit growth. While the measures announced today signals Vietnamese policy makers' ambition to support the economy, we think the impact will be marginal.