The decision to raise corporate interest rates by 0.50% is the strongest hike made in a single meeting since May 2000. 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 study by CME Group, the market believes the Fed could raise its operating interest rate by 175-200 basis points in the final months of 2022 to a new range of 2.5% to 3.0%.
Fed officials have also decided to shrink the size of the Fed’s balance sheet from June 2022, starting with $47.5 billion a month ($30 billion in US Treasuries and $17.5 billion in stocks) mortgage-backed. securities), will increase to $95 billion per month after three months. month ($60 billion in US 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 is 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 most important consequences for the Vietnamese economy
According to analysts at VNDirect, the Fed’s tightening of monetary policy has a major impact on the Vietnamese economy.
First, the tightening of the global financial situation is diminishing the growth prospects of the global economy, leading to lower demand for Vietnamese exports.
The Fed’s tightening of monetary policy will raise lending rates (in USD), decreasing people’s consumption demand and reducing the need to expand corporate investment.
Many research organizations around the world have recently lowered their growth forecasts for both the global economy and the US economy, one of the main reasons being the tightening global financial conditions. Therefore, Vietnam’s export performance is likely to slow in the coming quarters as consumers in key export markets such as the US and Europe tighten their spending.
Second, deposit rates (in VND) have come under increasing pressure in the final 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 from the end of 2021, while the 3-month deposit and deposit rate remained unchanged. The annual performance of retail banks increased by 14 basis points and 13 basis points respectively compared to the end of 2021.
VNDirect believes that deposit rates will continue to rise from now until the end of 2022 due to rising USD interest rates and high inflationary pressures 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 rate of commercial banks could rise to 5.9-6.1%/year (currently 5.5-5.7%/year) by the end of 2022. year), still below the pre-pandemic level of 7.0%/year,” the report said.
Third, the rising USD interest rate is putting pressure on the external debt repayment obligations of the Vietnamese government and companies. According to VNDirect 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 companies to raise capital. international markets and lead to higher interest rates.
Fourth, in the financial market, the inflow of foreign indirect investment (FII) may be netted out in the coming months due to the influence of the “taper tantrum”. However, foreign investors have been continuously net sellers in the Vietnamese stock market for the past 2 years, so the impact of net foreign sales will be moderate as the market has prepared in advance.
Meanwhile, the flows of foreign direct investment (FDI) to Vietnam will be less affected as Vietnam remains an attractive investment destination in the trend of global supply chain diversification.
Fifth, a strong USD is putting pressure on the Vietnamese exchange rate. On April 31, 2022, the dollar index (which measures the dollar’s strength against a basket of currencies) reached 103 points, its highest level in 20 years. The strong USD pushed the USD/VND exchange rate up 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. ) from its 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 that the VND may 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 conduct an “appropriate” monetary policy with priority to support the economic recovery until at least the end of the second quarter of 2022.
Commenting on the above statement, experts said that while inflationary pressures are expected to increase in the coming months, the average consumer price index is forecast to be 2.5% in the first half of 2022 compared to the first half of 2022. Over the same period, still well below the government target of 4%.
In addition, domestic demand is still weak and has not yet fully recovered to pre-pandemic levels, and the SBV continues to prioritize maintaining low lending rates to support businesses and the recovery of the economy.
“Any monetary tightening will not happen until the second half of 2022 (more likely in the fourth quarter of 2022) and gains (if any) will be limited to about 0.25-0.5%.” VNDirect experts commented.
Experts also expect the State Bank to keep credit growth high to support the economy’s recovery. Credit capital flows will be prioritized for the manufacturing and service sectors, especially priority sectors such as industry, imports and exports, agriculture, forestry and fisheries.
In addition, the SBV will carefully monitor credit flows to risk areas such as real estate, securities and BOT (Build-Operate-Transfer) projects. Accordingly, VNDirect forecasts that credit growth will remain at a high level of 14% in 2022.
As for the interest rates for loans, the State Bank is implementing an interest compensation package with a scale of VND 3,000 billion. This package offers a loan rate of only 3-4%/year for companies hard hit by the COVID-19 pandemic.
In addition, the government intends to expand the package of interest payments for companies to VND 40,000 billion, with the emphasis on a number of priority topics, including small and medium-sized enterprises, companies participating in a number of key national projects, and doing business in certain sectors (tourism, aviation, transport).
VNDirect expects the interest compensation package to help cut the average lending rate by 20-40 basis points by 2022. However, the actual impact of the interest compensation package on businesses and the economy could be lower if commercial banks raise lending rates on other conventional loans to mitigate the rise in interest rates. to offset the deposit rate.