Lower interest rates

The State Bank of Vietnam (SBV) has lowered interest rates by 50bps. The refinancing rate is now 4.5% (from 5.0%) and the discount rate to 3.0% from 3.5%.

This is more stimulus from the central government to help boost the economy. There was already a 100bps rate cut back on March 17. In addition, according to CSIS, the Vietnamese government has announced a $1.16bn fiscal stimulus back on March 3, and then an additional $2.6bn in early April. This goes along with delays in tax collection to the tune of $7.6bn. That’s for a total $11.36bn or more than 4% of GDP (although some of it is just deferred).

There is even a call for further rate cuts, according to this Bloomberg article.

But people seem to be doubting the efficacy of the lower rates in actually stimulating the economy. The reasoning is that the cost of credit isn’t the problem, but rather it’s getting credit in the first place.

Why is this happening? Well, banks want to get back their money. So they are going to do careful due diligence in underwriting new loans now to make sure that companies can repay the loans at some point. Of course some companies will look fine (they have weathered the lockdown well - like MWG), a very few have actually done well (maybe the grocery stores or online ordering companies - like Instacart in the US), but the vast majority look worse after this.

Luckily, it seems like economic activity is returning, based on pictures of Hanoi traffic. But my default is that everyone’s business is at least a little worse, just because economic growth is worse. And some businesses are really hurt: hotels, tourist companies, airlines. Many of these are getting stimulus, but probably not at the level as lost profits (and remember some of the stimulus is tax deferment that needs to be paid back).

This will have a disproportionate impact on smaller businesses. The one location hotel is going to be crushed operationally, and if I were a banker, I wouldn’t touch it with a ten-foot pole. Right now in the US, which doesn’t have as severe a lockdown, 2% of small businesses have permanently closed.

The only mitigating factor is that corporates aren’t that heavily levered (we have discussed this a fair amount). And small businesses have very little access to equity or debt capital in Vietnam, so it’s not like they will miss out on what they haven’t got.

Let’s hope that Vietnam has a V shaped recovery, but the word from China is that it might be more U-shaped.