Experts believe that Vietnam will maintain a “appropriate” monetary policy, with the priority being to support the recovery of the economy. at least until the end of the second quarter of 2022.
At the end of its two-day meeting in early May, the Federal Open Market Committee (FOMC) decided to raise the operating interest rate by 50 basis points to a new range from 0.75% to 1, 0%.
The decision to raise the operating rate by 0.50% marks the strongest increase made in a single meeting since May 2000. The US Federal Reserve (Fed) officials also hinted that they will continue to raise interest rates this year in an effort to contain inflation.
According to a survey by CME Group, the market thinks that the Fed can raise the operating interest rate by 175-200 basis points in the final months of 2022 to a new range in the range of 2.5% to 3.0%.
Fed officials also decided to reduce the size of the Fed’s balance sheet from June 2022, starting with $47.5 billion per month ($30 billion in US Treasuries and $17.5 billion in equities) mortgage-backed securities), after three months will increase to $95 billion per month ($60 billion in U.S. Treasuries and $35 billion in mortgage-backed securities).
Under this plan, the Fed could shrink its balance sheet by about $427.5 billion in the second half of 2022. It’s relatively small (only 5% of the company’s balance sheet size). Fed currently), so the impact on the liquidity of global financial markets is not great.
5 main impacts on Vietnam’s economy
According to analysts at VNDirect, the Fed’s tightening of monetary policy has 5 major impacts on Vietnam’s economy.
First, the tightening global financial situation reduces the growth prospects of the world economy, leading to lower demand for Vietnamese exports.
The Fed’s tightening of monetary policy will increase lending interest rates (in USD) thereby reducing people’s consumption demand as well as weakening the need to expand investment of businesses.
Many research organizations around the world have recently lowered their growth forecasts for the global economy as well as the US economy, one of the main reasons being because of increasingly tightening global financial conditions. Therefore, Vietnam’s export performance is likely to slow down in the coming quarters as consumers in key export markets such as the US and Europe tighten their spending.
Second, deposit interest rates (in VND) are under increasing pressure in the last months of the year. As of April 26, 2022, the 3-month and 12-month term deposit interest rates of state-owned banks remained unchanged compared to the end of 2021 while the 3-month deposit interest rates and deposit interest rates remained unchanged. 12-month term performance of private banks increased by 14 basis points and 13 basis points, respectively, compared with the end of 2021.
VNDirect believes that deposit interest rates will continue to increase from now until the end of 2022 due to rising USD interest rates and high inflationary pressure in Vietnam in the coming quarters. However, the increase is not expected to be large, about 30-50 basis points for the whole of 2022.
“We believe that the 12-month term deposit interest rate of commercial banks can increase to 5.9-6.1%/year by the end of 2022 (currently at 5.5-5.7%/year). year), still lower than the pre-pandemic level of 7.0%/year,” the report said.
Third, the rising USD interest rate puts pressure on the foreign debt repayment obligations of the Vietnamese Government and enterprises. According to VNDirect’s estimates, Vietnam’s external debt will account for 39% of GDP by the end of 2021. In the context of tighter liquidity in the international financial market, it will be difficult for the Government and Vietnamese enterprises to raise capital. international markets and incur higher interest rates.
Fourth, on the financial market, foreign indirect investment (FII) inflows may continue to be net withdrawn in the coming months due to the influence of the “taper tantrum”. However, foreign investors have continuously been net sellers on Vietnam’s stock market in the past 2 years, so the impact of foreign net selling will be moderate because the market has prepared in advance.
Meanwhile, foreign direct investment (FDI) flows into Vietnam will be less affected as Vietnam remains an attractive investment destination in the trend of global supply chain diversification.
Fifth, a strong USD puts pressure on Vietnam’s exchange rate. On April 31, 2022, the dollar index (which measures the strength of the dollar against a basket of currencies) reached 103 points, its highest level in 20 years. The strong USD pulled the USD/VND exchange rate up by about 0.6% in the first 4 months of 2022.
However, VND remains one of the most stable currencies in the Asia-Pacific region. According to VNDirect, the basic factors to keep the VND stable in recent years are still maintained, including a current account surplus and high foreign exchange reserves.
Experts expect the current account surplus to grow to 1.9% of GDP in 2022 from a projected deficit of 1.0% of GDP in 2021. Vietnam’s foreign exchange reserves are expected to reach 122 $0.5 billion at the end of 2022 (equivalent to 4.0 months of imports) from the current level of $105 billion.
Therefore, VNDirect believes that the USD/VND exchange rate will be stable at 22,600-23,050 in 2022 and the VND could fluctuate within a relatively narrow band (+/-1%) against the USD.
Will Vietnam continue the easing policy?
According to VNDirect, the State Bank of Vietnam (SBV) will maintain a “appropriate” monetary policy with a priority on supporting the economic recovery, until at least the end of the second quarter of 2022.
Explaining the above statement, experts said that, although inflation pressure is expected to increase in the coming months, the average consumer price index in the first half of 2022 is forecast at 2.5% compared to the first half of 2022. over the same period, still much lower than the Government’s target of 4%.
In addition, domestic demand is still weak and has not fully recovered to pre-pandemic levels and the SBV still prioritizes the goal of maintaining low lending rates to support businesses and the recovery of the economy.
“Any monetary tightening will only take place in the second half of 2022 (more likely in Q4/2022) and gains (if any) will be limited to around 0.25-0.5%.” VNDirect experts commented.
Experts also expect the State Bank to allow credit growth to remain high to support the recovery of the economy. Credit capital flows will be prioritized for the manufacturing and service sectors, especially priority sectors such as industry, import and export, agriculture, forestry and fishery.
In addition, the SBV will carefully control credit flows into high-risk areas such as real estate, securities and BOT (Build-Operate-Transfer) projects. Accordingly, VNDirect forecasts credit growth to maintain a high level of 14% in 2022.
Regarding lending interest rates, the State Bank is implementing an interest rate compensation package with a scale of VND 3,000 billion. This package offers a loan interest rate of only 3-4%/year for businesses strongly affected by the COVID-19 pandemic.
In addition, the Government plans to expand the size of the package of interest rate compensation for businesses to VND 40,000 billion, focusing on a number of priority subjects, including small and medium-sized enterprises, enterprises participating in a number of national key projects, and doing business in certain industries (tourism, aviation, transportation).
VNDirect expects that the interest rate compensation package can help reduce the average lending interest rate by 20-40 basis points in 2022. However, the actual impact of the interest rate compensation package on businesses and The economy could be lower if commercial banks increase lending rates on other conventional loans to offset the increase in deposit rates.