Interest rates and exchange rates will be "easier" in 2019, won’t they?

	Creating a new rate for mobilizing interest
	Increasing pressure on interest rates
	G-bonds see higher interest rates at latest transaction

Investors are waiting for the results of the FED meeting on the 18 and 19 of December

Recently, policy makers have started signaling the possibility of slowing interest rate increase by the Federal Reserve (FED) in 2019. Accordingly, the FED may plan to raise interest rates to slow productivity down or even end the current tightening cycle and will instead "stand still" until the economic picture becomes clearer. If this becomes a reality, Vietnam's exchange rate and interest rates will be relieved and become easier.

Two trends of interest rates

Since October, some banks have started to increase deposit rates and higher at the end of year. Currently, deposit rates at some banks have risen to over 8% / year. On the interbank market, interest rates also continued to increase. According to the listing of the SBV, the overnight average interest rate is currently 4.82% / year; 1 week is 4.84% / year; 1 month is 5.34% / year. Especially, the 6-month term has an average interest rate of 6.08% / year.

Explaining the trend of increasing deposit interest rates of banks in recent months, Mr. Pham Hong Hai, HSBC Vietnam General Director pointed out two trends. Firstly, the increase of USD interest rates on the world market makes the VND interest rates also adjust to avoid putting pressure on the exchange rate. However, according to Mr. Hai, in 2019 the trend will be different due to the expectation that FED will stop the interest rate increase cycle, reducing the pressure on VND interest rates.

Secondly, banks are racing to prepare capital for growth in 2019. At the same time, the ratio of short-term capital for medium and long-term loans will be reduced to 40% from 2019, so banks must need more medium and long term capital. “It is true that deposit interest rates have increased relatively strong recently, but this trend will not continue to be fast. If we look at the lending interest rate level, there is almost no change; especially banks hardly change interest rates for companies with good credit quality. The rapid increase in deposit rates but no increase in lending rates will reduce the profitability of banks. Therefore, in the coming time, the mobilizing interest rate will be hard to push forward,”- Mr. Hai said.

In addition, this year also has another point that there is no liquidity loss as in previous years. Some banks have increased interest rates, but the increase in interest rates does not stem from the cause of loss of liquidity but from the strategy to restructure the mobilized capital to meet the regulation on the ratio of short-term funds for medium and long-term loans for loans next year. "There is absolutely no race to attract capital at all costs like in previous years" - Mr. Hai affirmed.

In the report of the banking industry's prospect in 2019, BVSC has forecasted that economic growth in 2019 will slow down to 6.4 - 6.5%. Economic growth will slow down in line with the demand for loans to expand production and business from businesses that can slow down. Meanwhile, credit supply is under pressure from capital prepared for Basel II and the impact of new policies issued by the State Bank, such as "tightening" real estate credit through the regulation of raising the risk factor for loans for real estate business increased by 200% in early 2018 and 250% in early 2019, while reducing the ratio of short-term capital for medium and long-term loans to 40% from the beginning of 2019. From the above factors BVSC believes that credit growth in the next 3-5 years will be maintained at about 14% / year, lower than the period of 2015-2017 (average of 18.1%).

Exchange rate is stable in the range of 2 - 3%

At the beginning of the week, the SBV announced the central exchange rate continued to increase by 5 Dong to 22,783 Dong / USD. With a margin of +/- 3%, USD price is allowed to trade in the range of 22,100 - 23,466 VND. Compared to the beginning of the year, the central exchange rate has increased by 358 VND, equivalent to an increase of nearly 1.6%, still following the direction of the Government (stable flexibilty in 1-2%).

Along with the trend with central rates, banks have raised the exchange rate by 15 Dong compared to the previous week. Most banks are listing the exchange rate at 23,360 VND / USD in the afternoon. The exchange rate difference between Big 4 and private joint stock banks is VND 90 and VND 80, respectively.

However, Mr. Pham Hong Hai still believes that, with the expectation that the FED will stop raising interest rates in 2019, the pressure on the foreign exchange market will also decrease. However, it is worth noting the fluctuation of the RMB in 2019. It is not sure what will happen in the next US-China trade conflict. However, from HSBC's point of view, China will not use the Yuan as a tool in this trade war. Therefore, if the Yuan remains relatively stable, the VND will remain stable in a range of about 2-3%.

Increasing attractiveness for government bonds

Currently, the focus is waiting for investors is the meeting of the FED on USD interest rates. But looking in the long term, financial circles in the world still predict that the dollar will fall, because the US economy reveals many signs that it has passed the peak growth period, and will suffer losses from the trade war with China.