Interest cuts fail to impress investors

Monday, Jul 22, 2013 08:43

Interest on deposits of more than one year is still 8-9 per cent, meaning that with inflation expected to be no more than 6-7 per cent this year, real returns will be in positive territory.—Photo vinacorp

by Compiled

(Biz Hub) —Following the State Bank of Viet Nam's decision to lower the deposit interest rate cap to 7 per cent in June, banks have cut interest rates accordingly.

While many thought this would cause investors to switch to other asset classes like gold, real estate, or securities, this has not happened.

Vietnamese have for long had a predilection for gold as an asset, and prices of the metal are now at the lowest levels in two years, meaning it is an attractive investment option as deposit interest rates plummet.

But two factors are keeping them away from gold – the extreme volatility in prices in recent weeks and the central bank's measures to tighten management whose outcomes remain untested.

Besides, domestic prices remain significantly higher than global prices despite a recent narrowing, and this suggests a further reduction may be on the cards.

Property is another traditional investment channel and here too prices are continuing to slide.

But with the economy yet to turn around, the sector is not thought to be profitable.

That leaves securities, which seem to be pretty now attractive following the market's strong recovery in the first five months.

But it is an inherently risky investment and requires knowledge of companies and their functioning in the absence of mutual funds.

With the other asset classes not yet ripe for inflows, in the short term bank deposits seem the best option.

Interest on deposits of more than one year is still 8-9 per cent, meaning that with inflation expected to be no more than 6-7 per cent this year, real returns will be in positive territory.

Banks lose enthusiasm

In the last few months government bonds were a prime choice for banks with excess liquidity that sought reasonable profits without risks.

But that is changing. With the relentless fall in interest rates, bond yields have become very modest, and banks are less keen on them.

The first six months saw the issue of bonds worth VND78 trillion (US$3.63 billion) or equivalent to the value of those issued in the whole of 2012.

The coupon rates have plummeted by 2.5 percentage points for two-year government bonds and 2 per cent for five-year bonds.

For terms of one and three years they are down by 2.1-2.2 percentage points, and for five – and seven-year bonds by 1.5-1.7 percentage points.

Thus, recent auctions of bonds have proved to be duds, with a mere 2 per cent being bought.

Demand for the bonds is unlikely to pick up this year due to various factors that are at play, according to analysts at the Bao Viet Securities Joint Stock Company.

A significant amount of money is, instead, likely to be used by banks for preferential loans for low-income earners to buy housing.

With the Viet Nam Asset Management Company starting operations and likely to take some of the bad debts off banks, lenders are likely to focus on lending.

Fast-food market

After much consideration, McDonald's has finally decided to take the plunge: The US fast-food giant will open its first restaurant in Viet Nam next year.

Though a latecomer to a country where other western brands like Starbuck, Subway, and Pizza Hut have a big presence, it has managed to create a buzz in the market.

Its arrival despite the economic situation shows that Viet Nam's youthful population – more than half the people are aged less than 25 – is a strong attraction for foreign consumer firms.

It is also the culmination of a recent rush by US food companies to the country. Late last year the world's second largest fast-food chain, Burger King, and largest coffee brand, Starbucks, made their debuts.

With all the big boys finally in town, the Vietnamese fast-food market is set for an exciting time, especially for Vietnamese operators.

Last year W&S Online Market Research Company made a survey of the domestic fast-food market and found that the most popular brands are KFC, Lotteria, and Pizza Hut.

KFC and South Korea's Lotteria each have 140 outlets.

But in a market growing at 30 per cent per year, Vietnamese fast-food operators seem indifferent.

As a result, there are a mere handful of them like Pho 24, Vietmac, and Wrap&Roll.

Nguyen Minh Duc of Ha Noi's Viet Nam National University, who researched the market, says: "This lucrative market is the playing field of international brand names.

"Vietnamese fast-food products are still not successful though some have tried to penetrate the market."

The reasons are not hard to see.

Fast-food restaurants are mostly located in crowed places, supermarkets, and shopping malls, generally expensive places to lease.

A prime location is a critical factor for the success of fast-food restaurants. The ability to sustain losses for a long period is another.

Obviously, these take money and Vietnamese investors cannot match the financial muscle of the big chains. — VNS

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