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Pressure on Vietnam’s economy with the Fed hiking interest rates

Pressure on Vietnam’s economy with the Fed hiking interest rates

Tuesday 10, 05 2022
With the Fed’s current interest rates hike, there have been concerns about its impact on Vietnam’s economy, and the possible, eventual changes in monetary policy.

Impacts on Vietnam's economy

After the regular policy meeting in May, the Fed decided to raise the base rate by 0.5 percentage points, to 0.75-1%. That has been Fed's largest interest rate increase since May 2000 to curb inflation.

Inevitably, Fed's decision will greatly affect the world economy, including Vietnam. Dr. Can Van Luc and the BIDV Research and Training Institute authors mentioned 4 main impacts on Vietnam's economy.

Vietnam's economy

  • An increase in global interest rates may slow down the world economy's growth, reducing the demand for Vietnam's export goods.

  • Putting greater pressure on the USD/VND exchange rate.

  • Causing the cost of new loans and debt repayment obligations in USD to increase.

  • Investment flow will be affected, especially foreign ones.

In mid-April, the International Monetary Fund (IMF) released a report on the world economic situation and lowered its forecast for global economic growth in 2022 to 3.6%, down 0.8 percentage points compared to the previous forecast.

The United States and Europe are areas heavily affected by the Russia-Ukraine conflict. According to the IMF forecast, growth in Europe in 2022 will slow to 2.8%, which is 1.1 percentage points lower than the previous forecast.

The US recently announced that its GDP growth in the first quarter decreased by 1.4%, sharply lower than the growth rate of 6.9% in the fourth quarter of 2021. The purchasing power of the US economy, also partly due to record inflation, has slowed down. Meanwhile, China's economy is being heavily affected by the "Zero Covid" policy.

When major economies, such as the US, Europe, and China, slow down, Vietnam’s economy will be affected because these are important import and export markets for Vietnam. There are even risks of supply disruption from China.

Evidence for this influence may be that the Purchasing Managers' Index (PMI) of Vietnam's manufacturing industry remained at 51.7 points in April 2022, only equivalent to March, while the pandemic has been better controlled, and production has been recovering.

Purchasing Managers' Index

According to IHS Markit, Vietnam's manufacturing output in April increased again when the pandemic wave decreased. Companies have begun to recruit more workers and expand production. However, the growth rate of new orders slowed down. The reasons are the sharp increase in commodity prices and the difficulties in buying raw materials from China when the country continues to implement very stressful pandemic prevention measures.

Monetary policy stays unchanged...

At least for the next three to six months. That has been stated in a recent report by VnDirect, in response to worries over inflation threats and the possibility that the State Bank of Vietnam (SBV) may have to raise operating interest.

The world's largest central bank being aggressive with interest rates raises concerns over its impact on developing economies like Vietnam. Vietnam's interest rate level has remained low from 2020 to 2021 to support the economy. SBV reduced the operating interest rate 3 times in 2020.

In addition, inflation pressure is increasing in Vietnam. There have been forecasts that the inflation rate will be over 4% in 2022, maybe even 7%, when the crude oil and natural gas prices have been high. Crude oil prices rising will increase the risk of inflation in Vietnam, especially for the transport price index.

Core CPI increased by 1.47% in April, bringing the 4-month average to 0.97%. Inflation maintained an upward trend but was still under the control of SBV. However, according to BSC Securities' assessment, if this situation continues, inflation is likely to exceed the Government's target in the third quarter.

Core CPI

3-month term deposit interest rate and 12-month term deposit rate of private joint-stock commercial banks also increased by 7 and 8 basis points, respectively, in the first quarter of 2022, compared to the last level in 2021.

These events make people worry that SBV may have to increase operating interest. However, VnDirect expects SBV to maintain an easy monetary policy until at least the end of Q2/2022.

Explaining further, VnDirect points out that while inflation is anticipated in the coming months, the average consumer price index in the first half of 2022 is forecast at 2.5% over the same period, still much lower than the ceiling of 4%. Domestic demand is still relatively weak and has not fully recovered to pre-pandemic normal. SBV still prioritizes the goal of maintaining low lending rates to support businesses and the economy to recover after the pandemic.

The securities company also forecasts that credit growth will increase by 14% year-on-year in 2022. Credit flows will be prioritized for the manufacturing and service sectors, especially priority areas such as import and export, agriculture, forestry, and fishery. On the contrary, SBV will strictly control credit capital flows into high-risk areas such as real estate, securities, and BOT projects.


Compiled by VietnamCredit

Vietnam Economy

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