Will the wave of interest rate increase slow down Vietnam s growth

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Dr. Nguyễn Bích Lâm

With the continuous reduction of petroleum prices, in your opinion, how will Vietnam’s inflation change?

According to calculations, with the consecutive decrease, the average petroleum price in July 2022 decreased by 8.7% compared to the previous month, the impact on CPI of the whole economy decreased by 0.31%; significantly reduce inflation pressure due to petroleum; partly alleviate difficulties for industries that use a lot of petroleum in production activities such as transportation, fishing.

In the first seven months of 2022, inflation of the economy is controlled at a reasonable level. However, in the last months of the year, there is not much room left, especially the trend of increasing prices is present with groups of essential consumer goods and services.

Vietnam’s economy has a large openness, domestic production is quite dependent on raw materials and fuel imported from outside. In the context of unresolved supply chain disruptions, pushing up prices of raw materials used for production, the Fed’s interest rate hikes have made the dollar value increase, causing commodity prices and raw materials purchased and sold in US dollars, in which oil becomes expensive, leading to increased import prices and inflation.

Currently, when thinking about inflation and inflation control solutions, we only care about the consumer price index, not to mention the price index of raw materials, materials used for production and the price of transportation services. while our country’s economy depends on 37% of input materials for production from imports.

The IMF’s economic indicators and global economic outlook forecast reflect the fact that the world economy’s growth has slowed down in the context of high inflation, the world economy is at risk of falling into recession. How will it affect Vietnam’s economic growth, Sir?

Although the US economy has had two consecutive quarters of decline, the world economy and aggregate demand have declined, this has an impact on Vietnam’s international trade but not much.

Most of Vietnam’s exports are essential consumer goods, such as textiles, footwear, agricultural products, and aquatic products. In countries when there is a recession, people still have to use these essential consumer goods. In addition, the value of Vietnam’s exports to the spending of other countries in the world is not large, so the export turnover of Vietnamese goods is not affected much. In fact, in the first seven months of 2022, our country’s export turnover of goods reached US$216.35 billion, up 16.1% over the same period last year.

Besides, Vietnam is still considered an attractive investment market due to its stable political and macroeconomic system. In the first seven months of 2022, foreign direct investment capital realized in Vietnam was estimated at US$11.57 billion, up 10.2% over the same period last year. This is the highest amount of foreign direct investment capital realized of seven months in the past five years.

Along with that, the State Bank of Vietnam operates a flexible exchange rate policy, closely following market movements, so when the Fed raises interest rates, the VND/USD exchange rate will not increase much because Vietnam’s foreign exchange reserves reach a relatively high level, and are able to withstand external shocks. The VND/USD exchange rate has increased slightly in recent years, contributing to increasing the competitiveness of our country’s exports.

However, our country’s economy is quite dependent on imported raw materials. When the US dollar appreciates in the context of a disruption in the global supply chain, it will significantly affect production stability and increase the impact of cost-push inflation due to imported inflation.

The US interest rate hike will also increase the foreign debt repayment obligations of the Government and enterprises. Currently, the level of self-borrowing and self-paying foreign debt in Vietnam is still in a safe framework. Compared with the group of countries in the region, Vietnam’s self-borrowing and self-paying foreign debt is still at an average level.

Thus, the Fed’s interest rate increase has an impact on Vietnam’s economy, but with the management of fiscal and monetary policies, flexible exchange rates to ensure the stability of interest rates and exchange rates will contribute to curbing inflation, macroeconomic stability, creating opportunities for successful implementation of the program of socio-economic recovery and development.

In your opinion, what needs to be done so that the Vietnamese economy does not miss out on growth opportunities?

In order to control inflation, maintain macro stability, and create an important foundation for economic recovery and development, the Government, ministries, branches, localities and enterprises need to be proactive, flexible and timely remove difficulties and obstacles in administrative mechanisms, policies and administrative procedures, review and abolish unreasonable regulations in order to cut input costs for enterprises, create a fair and open business environment, promote aggregate supply and reduce inflationary pressure.

In addition, the Government should focus on directing relevant ministries and branches to remove bottlenecks in the overlap among specialized legal provisions related to the implementation of public investment projects and limitations in the implementation of site clearance work. Accelerate the implementation of policies and solutions to improve the efficiency of using financial and monetary resources to support growth and improve the internal capacity of the economy.

In order for the economy not to miss out on domestic and international opportunities, the Government needs to reasonably regulate the prices of essential commodities such as petrol, electricity, services, health care, education, and implement social subsidies for difficult situations, thereby minimizing the impact of the Fed’s interest rate hike on people’s lives, especially low-income people.

Thanks Sir!

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