Thematic Report

State Bank of Vietnam (SBV) tightens rules on state-owned commercial banks but relaxes prudential ratios for private-sector commercial banks

Inverted yield curve is dangerous, and Fed is responding slowly Fed has to cut interest rates at least twice this year If a recession occurs, the lag will be much later than that in the past The risk of a recession of the US economy is not high in 2019-2020 and the US stock market still has room for development

It is likely that Vietnam will still be in the watchlist for currency manipulation by the US in the upcoming period as two criteria for this tag of Vietnam will hardly change significantly. There is still a possibility that the US will raise tariffs imposed on some certain commodities from Vietnam, especially in areas where Chinese goods circumventing penalties of US by being shipped through Vietnam.

China is currently the largest trading partner of Vietnam, the devaluation of CNY has created a great pressure on VND movements; and a pressure to the monetary policy of SBV to protect competitive advantages of exports, as well as the production capacity of domestic enterprises against imports from China. We believe that the target of the SBV is to maintain a moderate trend of VND devaluation compared to the USD (although the VND still goes up against the basket of currencies) at about 2%. This level is enough to partly neutralize the adverse impacts on the strong depreciation of the RMB, but still creates a safety buffer to make sure the 3% target, set at the beginning of the year, will not be violated. However, we realize that the pressure of VND devaluation in the coming time is not high due to the following main reasons: (1) Based on the observation of the above technical changes of NEER & REER (Figure 3), the 106 is no longer considered a psychological threshold for VND devalua

Highlights: The VND’s depreciation level was 1.04% YTD by May 31, but the movements of exchange rates on the interbank and unofficial markets were quite different compared to those in the previous period. The main reasons leading to the depreciation of the VND include external factors such as escalating trade tensions between the US and China and the temporary supply constraints of foreign currencies. Outlook: It is forecast that the VND will depreciate 2.0 – 2.5% in the fundamental scenario.