VinaCapital: Vietnam is well tolerant of Fed rate hikes and global risks

Photo: Mr. Michael Kokalari, CFA, VinaCapital Chief Economist

According to Michael Kokalari, CFA, Chief Economist of VinaCapital, the Fed’s strong interest rate hikes have exacerbated the economic situation in the world. The world is already in a state of tension due to the Russia-Ukraine war and China’s shutdown due to COVID and has weighed on the global stock market, including Vietnam. However, Vietnam’s ability to withstand global economic shocks is much better than in the past, largely due to the Government’s sound policies to balance growth and economic stability.

The efforts of the US Federal Reserve (Fed) to curb inflation, mainly caused by problems with the global supply chain, have made Stock markets around the world plunged. Some investors are particularly concerned about the possibility of a “storm” for emerging market economies, as global interest rates rose sharply, and the USD/DXY index rose about 10% over the same period. the previous year period and the recent rise in energy and food prices.

Vietnam’s stock market has fallen more than 20% year-to-date, partly because the S&P500 index has corrected 21% from the beginning of the year, due to the phenomenon of “correlation coefficient approaching one during the market correction period” and a number of Vietnam-specific factors were discussed in the previous report. VinaCapital believes that the Vietnamese economy is more resilient to current difficulties in the US and Europe than in the past, thanks to the government’s policies introduced during the past decade to protect the economy from global economic storms.

The strengthening of Vietnam’s resilience helps the country cope better with Fed rate hikes than in previous interest rate hike cycles. This improvement is reflected by the mitigating impact that current uncertainties in the global market are having on the USD/VND exchange rate compared to the past shown in the three charts above.

VinaCapital said that although the VN-Index is showing signs of decline along with the global stock market, the country’s economy is still in a strong state, mainly due to domestic consumption – accounting for two-thirds of GDP. of Vietnam – is booming. Therefore, the market consensus expects VN-Index’s EPS will grow by nearly 20% this year, according to Bloomberg. Therefore, VinaCapital expects the Vietnamese stock market to recover strongly once the Fed eases the interest rate hike. However, the same cannot be said for all other emerging economies, especially those with large current account deficits and huge dollar-denominated debts.

Vietnam’s resilience to global monetary tightening has improved

Past periods of global stock market volatility have hit Vietnam hard – including the Financial Crisis Globally in 2008, the Fed’s “Taper Tantrum” event in 2013 and China’s renminbi devaluation in 2015. VinaCapital is always wary of market predictions that “this time will be different”, but we and other organizations have observed a number of bases that will help Vietnam’s economy significantly increase its resilience to the current escalation of global economic tensions.

For example, the Dallas Fed published research analyzing the worst-affected countries during the 2013 “Taper Tantrum” and concluding that emerging market and frontier market economies Most affected by the Fed’s tightening of monetary policy at the time were countries that had too few foreign exchange reserves and/or too much dollar debt. Vietnam currently has nearly $100 billion in foreign exchange reserves, in line with the IMF’s recommendation, and Vietnam’s foreign currency debt is at less than 40% of GDP, about half of which is essentially “soft” loans from supranational lenders (e.g. World Bank) on favorable terms.

At the end of 2021, the Economist and other magazines have published a ranking of the emerging/marginal market economies most vulnerable to the Fed’s rate hikes and Quantitative Tightening in the coming year. this year. Vietnam is ranked as the least affected country due to its modest debt balance, stable macroeconomic situation (including inflation), and a persistent current account surplus.

The resilience of the economy comes from the right policy decisions

The above predictions of the Economist magazine for Vietnam during the current tightening of monetary policy by the Fed have been proven by the following events: economic changes in Vietnam this year. The dong has depreciated less than 2% YTD, compared to the renminbi’s 5% decline, and inflation in Vietnam remains modest – in stark contrast to most developed economies and emerging.

Vietnam’s year-on-year inflation rate is currently below 3%, and VinaCapital expects the country’s inflation rate to average 3.5% this year (Vietnam’s CPI is likely to reach an average of 3.5% this year). peaking at around 5.5% year-on-year in the second half of 2022, and then falling to 4.5% by year-end). The government aims to keep Vietnam’s average inflation rate below 4% this year, so VinaCapital forecasts that the State Bank of Vietnam (SBV) will not need to raise the policy rate – currently around 4% – in contrast to other emerging ASEAN countries in the region, all of which are either raising interest rates or are expected to raise rates in the coming weeks.

Finally, the improvement in Vietnam’s resilience to global economic storms is the result of policies implemented during the past decade following decisions made at the highest levels of the government. The Vietnamese government circa 2011. At that time, policymakers changed their approach to managing the Vietnamese economy, moving from tacit approval of uncontrolled GDP growth, to a balanced one. balance between growth and macroeconomic stability. Policy decisions stem from that strategic change, including many macroprudential policies, control of reckless credit lending by domestic commercial banks, and efforts to increase the level of credit. the country’s foreign exchange reserves – the results of this effort can be seen in the chart below.

Furthermore, when China devalued the renminbi in 2015, which rocked the global stock markets (including Vietnam), the SBV switched from trying to maintain a fixed USD/VND exchange rate to a real one. implementing a “managed floating” regime, which further stabilizes the country’s macro-economy, thereby strengthening Vietnam’s resilience to global economic storms.



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