Fed sharply increases interest rates – impact on the world economy and Vietnam

On May 4, 2022 (US time), after the regular policy meeting in May, the US Federal Reserve (Fed) decided to increase the basic interest rate by 0.5 percentage points, to 0.75. %-first%. This is the largest interest rate increase since May 2020 to curb inflation, which is the biggest challenge in the current Fed’s monetary policy management. At the same time, the Fed also announced a plan to reduce the size of assets holding (decreased by nearly 50 billion USD each month from June 2022) from the current level of nearly 9 trillion USD (mainly consisting of treasury bonds and bonds). securities secured by residential mortgage loans). The possibility of interest rate increase according to the roadmap will still take place, but the dilemma is becoming more and more obvious.

Immediately after the Fed’s move, Dr. Can Van Luc and a team of authors from the BIDV Training and Research Institute have reported on a quick assessment of the impact of the above interest rate increase on the world economy and Vietnam.

US economic situation:

The US economy continued to have a good growth momentum in the first 2 months of the year, but from March 2022, it began to show signs of slowing down: (i) GDP in the first quarter decreased by 1.4% compared to the previous quarter (in contrast to compared with the previous quarter). with an increase of 6.9% in the fourth quarter of 2021; (ii) retail sales in March 2022 increased by 0.7% compared to the previous month, lower than the increase of 0.8% in February 2022. However, a number of indicators still maintain a positive trend such as: (i) the unemployment rate fell to 3.6% in March, the lowest level since March 2020, which is currently full employment. ; (ii) Manufacturing PMI in March 2022 reached 59.2 points, showing that the manufacturing sector is still in good growth. However, the US economy is facing many challenges, especially inflation pressure continues to increase and stay high (inflation in April 2022 in the US increased by 8.5% over the same period last year). year ago, the highest level since 1981). With this momentum, the Fed lowered its forecast for US economic growth, to about 2.8% (from 4% forecast at the beginning of 2022) and inflation to increase to 4.3% in 2022, before dropping to 2.7 % in 2023.

Impact on the world economy

For the global economy – finance, in the short term, the Fed’s rate increase by 50 percentage points does not have much impact because this is done according to the schedule and has been expected by the market before (according to CME Group, the possibility of the Fed increasing by 50 points has increased to 99%). before the meeting). The Fed’s 75-point interest rate hike scenario did not happen this time and the balance sheet shrinkage was also lower than expected (the contraction was only $400 billion, lower than the forecast of about $600 billion this year). now). The market understands that the Fed is taking a more cautious approach in controlling inflation and also avoiding causing a recession; in the context that the Russia-Ukraine conflict is still protracted and China’s “Zero Covid” policy is slowing the world economic recovery.

In short term, Stock markets, especially the US, closed on May 5 with a strong drop (the Dow Jones fell 3.1%, the S & P 500 fell 3.6%, Nasdaq fell 5%… ) although the Fed Chairman explained that he did not “consider” raising interest rates too strongly. The main reason here is: (i) the market is worried that raising interest rates, although smart, is difficult to cool down inflation (because current inflation is not caused by demand-pull factor, but by cost-push, due to disruptions in the supply chain, especially petrol and gas, etc.), it is difficult for the traditional method of increasing interest rates to be effective; (ii) while the economic growth momentum is slowing down, causing central banks of countries to fall into a more obvious dilemma.

In the medium termIn general, the fact that the Fed is expected to raise interest rates about 7 times in 2022, to about 2.75-3% by the end of the year and increase about 2-3 times in 2023, will make the cost of capital and debt repayment of governments. government, households and businesses increase, and the world economy slows down, some countries may fall into recession (stagflation)…etc. The positive omen here is the possibility of a recession for the economy. The US and the world at large will be unlikely when the monetary policy is forecasted to be proactive, moderate and flexible and the current uncertainties (geopolitical conflicts, China’s Zero Covid strategy and the disruption, disruption of global production and supply chains, etc.) will gradually decrease.

For Vietnam, in front of eyes, Although the direct impact on Vietnam’s economy and finance is not much, it has gradually become clearer. Specifically, the USD/VND exchange rate on the interbank market since March 16 (the first time the Fed raised interest rates) has increased by 0.36% since the USD index (DXY) increased by 4.25% compared to the previous year. with March 16. The pressure on exchange rate and inflation also led some credit institutions to increase deposit rates from 0.3-0.5% depending on the term and this trend continues. The fact that the Fed continues to raise interest rates in the coming months will have more obvious impacts on Vietnam’s economy and finance on the world market. at least 4 aspectsSpecifically:

Firstly, an increase in global interest rates may slow down the world economy’s growth, reducing the demand for Vietnamese exports. The fact that the Fed and some central banks continue to raise interest rates to deal with inflation, causing the borrowing costs of businesses and people to increase (making businesses and people consider investment and consumption, especially with capital). borrow more), demand for goods and services decreases; thereby reducing Vietnam’s export demand, which may slow down Vietnam’s economic recovery, in the context that the openness of Vietnam’s economy is at a high level (import-export turnover/GDP in Vietnam). around 185% in 2021) and the US is Vietnam’s top export partner (in 2021, Vietnam’s exports to the US will reach $96.3 billion, accounting for 28.6% of Vietnam’s total export turnover. ).

Second, The Fed’s rate hike will cause The USD appreciated against most other currencies, including VND, putting more pressure on the USD/VND exchange rate.. However, the USD/VND exchange rate is not expected to increase too much because: (i) the USD by the end of May 5, 2022 has increased by nearly 7% compared to the end of 2021; (ii) Vietnam’s foreign exchange reserves are reaching a fairly high level (over 110 billion USD), contributing to strengthening the buffer against external shocks and stabilizing the exchange rate; (iii) the supply of foreign currency such as remittances, FDI disbursement is forecasted to grow steadily, the trade balance in the first 4 months of the year has a surplus of 2.53 billion USD and the whole year is forecast to still have a surplus (about 4-8 months). billion USD); and (iv) The State Bank has maintained its policy of flexible exchange rate management, closely following market movements. Accordingly, Dr. Can Van Luc and the authors of the BIDV Research and Training Institute forecast that the exchange rate in 2022 will increase by about 0.8-1.2%.

Tuesday, interest rate hike of the Fed will work for interest rates tend to increase, causing the cost of new loans and debt repayment obligation in USD increase. According to the Public Debt Bulletin of the Ministry of Finance in March 2022, in total foreign loan repayment of Vietnam is 112.6 billion USD By 2020, the Government’s foreign debt payment will only account for about 3.1% (US$3.5 billion in conversion), the rest will be corporate debt (109.1 billion US dollars in equivalent – accounting for 96.9%). in which are mainly FDI enterprises – accounting for about 75% according to estimates by Dr. Can Van Luc and the author team of BIDV Training and Research Institute from another related report). Since there is no data on the foreign currency loan structure of Vietnam, the authors assume that 40% of the government borrowing is in USD, 60-70% is in USD for businesses, and the rest is in other foreign currencies. When interest rates and USD exchange rate increase, the obligation to repay foreign loans of enterprises (especially FDI enterprises) will increase significantly.

Wednesday, impact on investment capital flows, especially foreign indirect investment. When the Fed raised interest rates, some investors were risk averse, withdrew capital from emerging markets, and returned to invest in the US and other developed markets to shelter risks and enjoy interest rates. higher than before. This move happened in 2021 and is expected to continue in Vietnam’s stock market in 2022, although Vietnam’s economic outlook is still very positive. However, Dr. Can Van Luc and the authors of the BIDV Training and Research Institute forecast that foreign investors’ capital withdrawal (if any) will not be much for the Vietnamese market in the first 4 months of the year, foreign investors only net sold nearly 2.5 trillion dong, equivalent to nearly 110 million USD) because Vietnam is still considered an attractive investment market with a stable political foundation and high potential for economic growth (6-6.5% in the next period). 2022-2023), the macro-economy is basically stable (inflation is under control around 4%, budget deficit, public debt, Government debt repayment obligation increase but under control)…etc.

Four recommendations for Vietnam

In the context that Vietnam is making efforts to implement the socio-economic recovery and development program for the period 2022-2023, the economy will begin to recover when the epidemic is under control; to minimize the negative effects of the central banks of other countries, especially the Fed, tend to tighten monetary policy, increase interest rates; Dr. Can Van Luc and the author team of BIDV Training and Research Institute have 4 recommendations as follows.

One is, it is necessary to continue to strengthen coordination of monetary policy, fiscal policy and price management in order to stabilize the macro-economy. Accordingly, it is necessary to: (i) Continue to operate monetary policy proactively and flexibly with scenarios when there is a stronger monetary policy change of major central banks in the world; well coordinated with fiscal policy, ensuring the stability of interest rates and exchange rates, contributing to curbing inflation according to the target; (ii) Following, analyzing and forecasting developments in the international monetary and financial markets, it is necessary to develop a scenario that if the Fed raises interest rates quickly, the global economy recovers and weakens, leading to fluctuations in the market. global financial school; (iii) Continuing to take appropriate measures to healthy the financial market, strengthening investors’ confidence.

Two is, it is necessary to develop a roadmap and coordinate to implement the plan to increase the prices of goods under the management of the State (especially gasoline prices, electricity prices, health – education service prices, etc.) in an appropriate manner. gently, not rushing at a time. In addition, it is necessary to strengthen communication and measures to stabilize prices (especially at peak times) to minimize inflation and the phenomenon of “dropping water with the rain”…etc.

Three is, monitor and evaluate foreign debt obligations when the Fed raises interest rates in order to give timely warnings to businesses; continue to actively and flexibly manage the exchange rate and foreign exchange market in order to stabilize the exchange rate, contribute to controlling inflation and support businesses, especially those with large foreign debt.

Four is, develop plans with synchronous and consistent policies and solutions to increase the economy’s resilience to external shocks, in which strengthening internal resources, overcoming weaknesses and barriers bumpers; increased risk buffers; Proactive, flexible and coordinated policy, policy implementation more effectively is essential.

According to H.Kim

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