Complications of US-China trade war and Brexit

What does Vietnam have to do in this situation? SGGP Investment & Finance had a discussion with Nguyen Duc Hung Linh, Director of Research and Investment Advisory of SSI, to further clarify this issue.

Exchange rate under control
JOURNALIST: - Based on the complicated US-China trade war and Brexit, what do you feel about the international and domestic money markets?

Mr. NGUYEN DUC HUNG LINH: - The risk is high. US and China are the two biggest economies in the world. England, Germany, France, Italy are also top countries. These countries have been currently either facing internal difficulties or conflict with their trade partners. 

The US-China trade war is very unpredictable while Brexit problem is hard to tell. The main currencies like USD, CNY, EUR and GBP have been under huge pressure. We should be well prepared for a shock as the international money flow is changing and investor sentiment has been weak.

Under this situation, the currency of an open country like Vietnam will be impacted significantly, especially vs CNY.

- FED affirmed that it will keep interest rate stable in coming time. However, market still expects FED to cut its interest rate. What do you think about this issue?

- Although FED sends the message that it has strong belief in the growth of US, we have to admit that the recent escalation of US-China trade war has created many challenges for US, China and other countries. The weaker economic growth, plus a low Core CPI are basis for markets to expect FED to cut its interest rate in 2019.

FED rate has been an important indicator for money policies of many countries. The four consecutive hikes of FED rate in 2018 was the reason for the increase of interest rate of other 35 State Banks in the world. However, we also saw the other 37 countries cut their interest rate. This means that the money policies are dependent on different economic status and management target of different countries.

Since 2018, the State Bank of Vietnam has been raising the interest rate of treasury bill from 0.6% to 3%. The interest rate level on the primary market also went up by 0.5-0.7%/year. Vietnam interest rate is impacted by several inside and outside factors. However, in my opinion, the internal elements are more important. FED interest cut should not be the reason for Vietnam interest rate cut as the interest rate movement is also influenced by the changes of exchange rate, the status of banking system liquidity and payment balance.

- Does the recent increase of reference exchange rate and trading foreign exchange rate impact the target of government which was set at beginning of the year to control exchange rate?

- The increase of exchange rate is in line with the target of the State Bank. Up to now, the exchange rate has increased 1.06% YTD. 
In the first four months, the reference exchange rate had increased by 0.9% while the trading exchange rates in interbank market and black market were flat thanks to the stable global economic environment as well as favorable demand and supply conditions.

Since May, the interbank and black markets have been more volatile. However, this movement does not impact the reference rate as it is already high and enough to create room for trading exchange rate to move.

We should understand that the movement of foreign exchange rate recently is inevitable. It rose 0.8% YTD vs 2.5% change of USD/CNY rate.

I think the exchange rate will be under control this year as the macro economic conditions are stable. A higher level of foreign reserves plus better foreign exchange supply, which is built up by M&A deals, are enough to meet the market demand.

Stable interest rate

- What do you think about the deposit and lending interest rate in coming time?

- If there is no unexpected movement in the international market, I think the deposit rate will fluctuate around the current level. Banks have to raise funds to meet their lending demand and the requirement of the State Bank to reduce the ratio of short-term deposits to mid-and-long term loans from 40% to 30%.

Lending to retail customers at higher interest rate will help banks to keep their profitability stable without raising their deposit rate.

Furthermore, although deposit rate has been increasing over last 6 months, the lending interest rate to manufacturing sectors remains stable. We also see several low-interest rate packages of big banks to support the economy.

This year, the profit of 17 banks is projected to climb just 18% vs 31% growth in 2018. However, the number of banks that meet the Basel II requirements are increasing, showing that banks are resetting to achieve a more sustainable growth. Expanding the income generating base, changing the client structure, being more effective in cost management are banks’ priorities currently, rather than increasing lending interest rate.

- How does money market movement impact the stock market and what do we have to do to continue attracting foreign investments?

- Although the stock market does not connect directly it links to money market. These two markets are very sensitive to change in macro-economic status.  When risk is expected to increase, such as risk from US-China trade war, both markets move negatively. Hence to determine how money market impacts the stock market, we should understand the economic nature first.

Currently, Vietnam stock market is significantly impacted by foreign investment. Amid slower growth and depreciating currencies of emerging countries, foreign investors tend to buy safer assets like bonds, JPY currency or gold.

The selling and withdrawing activities of foreign investors have been creating pressure in stock market of not only Vietnam but also other countries. The investment injection or withdrawal depends much on FED behavior, the US-China trade war progress and other economic issues. This means that the pressure from investment withdrawal will not be huge and long-term.

- Thank you very much.

Vietnam always has good stories to attract foreign investors, such as strong emerging market, foreign ownership limit opening, or IPO. What we need to do is to continue making these stories more interesting, and update them continually for investors to see Vietnam worth considering for further investment.