Fed rate hike to have limited impacts on Vietnam

As Vietnam’s inflation continues to stay under control and the Fed’s decision to raise its interest rates for the first time since 2018 is expected to have limited impacts on the former’s economy.

A customer at a branch of PVCombank in Hanoi. Photo: Pham Hung

The Fed’s latest move, however, did not come as a surprise to the market, as many had anticipated a rise in interest rates due to the record inflation in the US during the past months.

Inflation, as gauged by the Fed’s preferred core PCE (personal consumption expenditures) measure, rose by 6.1% in January, more than triple the annual target of 2%.

Against the backdrop of high inflationary pressure in the US or Europe, Vietnam’s inflation remains under control, so experts suggested impacts from Fed’s decision would not be significant to the foreign exchange rate or the average interest rate in the domestic market.

Nguyen Duc Do, Vice Director of the Institute of Economics-Finance (IEF) noted the aggregate demand in Vietnam has not fully recovered, so inflation would not rise soon.

“Even with the current rising prices of goods and commodities on the market, the expansion of the consumer price index (CPI) in 2020 is estimated at around 2%,” he said.

In this context, Do said there would be no reason for the State Bank of Vietnam (SBV), the country’s central bank, to tighten monetary policy this year.

“There is a chance for the interest rate, however, to go up slightly in 2022 when the credit demand increases,” Do continued.

A report from the Viet Dragon Securities Company (VDSC) echoed Do’s view by saying the possibility of rising interest rates in Vietnam would not be linked to Fed’s decision, but from the resumption of business activities as the Government reopened the economy.

Meanwhile, experts suggested the exchange rate would be under greater pressure compared to last year but remains stable.

This is since Vietnam’s foreign reserves have been sizable and the balance of payments is supported by a trade surplus and strong inflows of remittance from abroad.

The average growth of remittance to Vietnam for the past three years stood at 4.4% per year and could be on track to reach $18.9 billion in 2022.

Banking expert Can Van Luc shared the sentiment and said the USD/VND exchange rate may go up by a small margin, thanks to the recovery of the economy.

“In that case, there should be limited impacts on the supply-demand of foreign currency in short-term, rather than from Fed’s rising interest rates,” Luc added.

Bright economic prospects to keep a hold on investors

With growing uncertainties surrounding the global economy in 2022, many voiced the necessity for Vietnam to keep the interest rates and inflation under control to respond to possible external shocks.

This year, the SBV targets credit growth of 14%, slightly unchanged from the growth recorded in 2021.

Despite the limited impacts from Fed’s rate hike, experts noted the Government should be cautious as the US agency may take similar actions from now on until late 2022.

In case Fed raises the rates by a larger margin, the exchange rate in the domestic market would no doubt be affected, with local importers being the first group hit by such a move.

On the other hand, companies exporting goods to international markets would gain advantages, especially those of US-bound.

For the first two months of 2022, Vietnam’s exports to the US rose positively to $18.3 billion.

Another concern was the risk of investors withdrawing capital from emerging markets once the Fed continues to raise interest rates.

However, for Vietnam, the bright prospects of a strong rebound in 2022 would be able to keep a hold on investors, said Luc. Foreign direct investment (FDI) commitments to Vietnam during the first two months rose by 7.2% year-on-year to $2.68 billion.

This year, Vietnam’s GDP growth may rebound to 6.5-7%, significantly higher than the 2.58% recorded in 2021. In addition, inflation is forecast to stay around 3.4-3.7%, lower than the Government’s target of 4%.