Hanoi (VNS/VNA) - Vietnam’s credit growth is forecast to slow to only8 percent in 2020 from 13.7 percent last year due to a sharp slowdown ineconomic activity amid the COVID-19 pandemic.

According to analysts from Fitch Solutions, weak economic activity would weighheavily on credit demand, even with lower interest rates.

The State Bank of Vietnam (SBV) reduced its policy interest rates on March 17,which took its refinance rate to 5 percent from 6 percent previously, anddiscount rate to 3.5 percent from 4 percent. The overnight lending rate in theinter-bank market was also cut to 6 percent from 7 percent.

“We maintain our view that the ample liquidity in the banking sectortechnically should not warrant further interest rate cuts, as the key problemlies in a lack of loan demand amid a weak economic outlook, and accordinglyforecast the refinance and discount rates to be held at 5 percent and 3.5 percent,respectively, through 2020,” the analysts said.

However, with the global economy aggressively easing monetary policy, Fitchhighlighted that risks to its monetary forecasts were towards further easingthrough both interest rates and other macroprudential measures as the centralbank attempted to lift economic growth towards the Government’s 6.8 percentreal GDP growth target for 2020.

According to Fitch, a softening of inflation on the back of low global oilprices and softer core inflation due to weaker domestic demand would also allowfor easier monetary policy if needed.

Fitch has revised its 2020 average headline inflation forecast to 3.8 percentfrom 5.7 percent to account for the plunge in global oil prices amid anintensifying supply glut and weakening core inflation.

“Our inflation forecast lies within the SBV's 3.2-4.2 percent projection forthe year and also reflects our view for the SBV to succeed in its target tokeep inflation below the 4.0 percent level. Headline inflation eased to 4.9 percentyear-on-year in March, from 5.4 percent year-on-year in February, due to easinginflation in the housing and construction materials category and a deflation intransport prices, which offset a slight acceleration in food inflation.”

Fitch analysts believed that both domestic and external demand would facestrong headwinds over the coming quarters. Income losses due to a weak economicenvironment, which was likely to see workers being furloughed and/or have theirwages reduced, would weigh on private consumption. A weak demand outlook, bothinternally and externally due to a global economy in recession, would alsoprompt businesses to conserve cash and delay capital expenditure. These factorswould reduce demand for new loans.

“Banking sector earnings will also come under pressure. We expect this to bedue to weaker demand for credit, narrower interest margins, and the centralbank’s COVID-19 crisis macroprudential measures.”

Based on the SBV’s policy rate cut applied last month, deposit rates have beenreduced by up to 0.3 percentage points, while lending rates have been reducedby 0.5 percentage points.

Though individual banks were still free to set their own rates on depositinterest for deposits of over six months, Fitch believed that unless banksreduced the interest rates offered on these longer-dated deposits by asufficiently larger margin, they were likely to experience a net compression oftheir interest margins, which compounded by weaker credit growth would see afall in profitability across the sector as a whole.

Finally, Fitch said, macroprudential measures, such as rescheduling debtrepayment and exempting and reducing interest and fees, announced by the SBV onMarch 12 to tackle the economic crisis, would also slash banking sectorearnings./.