Economics

(4) Central bank nearly done
The central bank has been doing its bit to support growth, having slashed the base interest rate by 550bps to 8.5% over a two-month period ending December, unwinding all but 25bps of the tightening that was delivered in the first half of 2008. With the base rate at 8.5%, the cap on the lending rate stands at 12.75% (1.5 times the base rate). Given the aggressiveness of the move, we think the bulk of the easing has now been delivered by the central bank. However, we do believe that the bank will, as an insurance policy, cut rates by a further 100bps in the first quarter of 2009, with rates bottoming at 7.5%. After that, we think rates will hold steady right through the year and into 2010. Commercial bank lending rates are coming down in line with the policy rate cuts, although the question remains whether firms will be willing to get additional loans, especially when few new orders are coming their way. Additionally, banks are likely to be prudent in an environment of slowing economic growth and rising nonperforming loans, and so may prefer to lock their funds in government bonds rather than expanding their balance sheets.
The central bank has also taken aggressive action to boost liquidity in the domestic banking system by slashing the reserve requirement ratio by 600bps to 5% and agreeing to buy back VND20.3trn of compulsory Treasury bills sold to commercial banks in March last year. The central bank may be inclined to do a bit more, but if overnight rates are used as an indicator then liquidity is already clearly ample in Overall then, we expect the trade deficit to improve in 2009, declining to around 14% of GDP from 22% of GDP in 2008. Assuming FDI inflows of USD5bn and remittances of a similar amount, this sees the current account deficit to improve by 3ppts to 10.5% of GDP.
(5) Trade deficit to shrink
As we mentioned in the growth section, exports have turned sharply and will continue to weaken into 2009 given the collapse in demand from the developed world and also softer growth in Asia.
To re-iterate, we expect exports to contract by 3% over 2009, down from a 30% expansion in 2008.
On the import side of the equation, we think the fall will be even greater, on the back of the collapse in commodity prices, weaker demand for intermediate goods (inputs for exports) and softer domestic demand. As such, we are pencilling in
an 8% contraction in imports compared with a 30% expansion in 2008.