The U.S Federal Reserve (Fed) decided to raise the benchmark interest rate by 0.25 percentage points while implying that from now till the end of the year, the rate could be raised two more times. How will this affect the Vietnamese economy?
*What are the risks for the Vietnamese economy?
On the morning of June 14 (local time in Vietnam), Fed officially announced to raise benchmark interest rate by 0.25 percentage points. As such, after remaining the interest rate of 1.5-1.75 percent in May, in this June, the decision was made. With this decision, the federal interest rate is currently about 1.75-2 percent.
In fact, Fed’s decision to raise interest rate was not surprising to investors as well as economic experts because it was anticipated.
The surprising thing was that, along with the decision to raise interest rate this time, Fed also hinted that there would be two more interest rate hikes this year.
That means in 2018, there will have four times of interest rate increases instead of just three last year and the previous projection. The reason for Fed’s interest rate hike was because Fed’s economy has strengthened.
Responding to the aforementioned information, the U.S stock market immediately went down on Wednesday.
All the three indexes of Down Jones, S&P 500 and Nasdaq Composite fell. There needs time to wait for the world market’s reaction, but surely many economies are worried about this decision of Fed. The reason is the U.S’ interest rate hike will make the US dollar to be preferred, and its value will increase compared to other currencies, including dong.
Regarding this issue, economists admit that Fed’s decision to raise interest rate is not too surprising as it was anticipated and this will have certain impact on Vietnam’s economy. “The fact that the U.S continued to raise interest rate as well as the relative positive growth of the world’s biggest economy is likely to lead to the US dollar appreciation instead of depreciating like last year, putting pressure on Vietnam currency”, said Can Van Luc.
Senior expert Cao Viet Sinh, former vice minister of the Ministry of Planning and Investment (MOPI) said Fed’s decision to raise interest rate along with the announcement to increase interest rate two more times in this year” will “greatly influence on Vietnam’s economy”.
“There may not have large impact in the immediate future but it is going to be different at the end of the year, perhaps even more in the following year. This decision is going to affect dong’s exchange rate. Currently, Vietnam still runs trade surplus ($2.67 billion after the first five months of the year-reporter), so there is not much affect. However, we still have to consider exchange rate issue in the long run,” said Cao Viet Sinh.
The information shows that currently, though Fed has not raised interest rate, the exchange rate pressure was higher than the previous year. Last year, the US dollar depreciated nearly 10 percent but since the beginning of this year, this currently increased about 1.8 percent. This will put pressure on US dollar/dong exchange rate.
In the recently released macro-economic report in the first five months of the year, the National Financial Supervisory Commission (NFSC) said from now till the end of 2018, there needs to pay attention to exchange rate issue because the US dollar is tending to increase again, especially when Fed continues to increase interest rate. “There needs to keep abreast of the exchange rate policy and have flexible regulatory moves”, said NFSC.
*More pressure on inflation
Not just exchange rate issue, Fed’s interest rate hike which may be four times in this year, will put more inflation pressure on Vietnam, which has been a concern of the economy. “It is likely that Fed’s interest rate increase does not have direct impact but will have indirect impact on Vietnam’s inflation”, said Cao Viet Sinh.
It should be recalled that right after the general Statistical Office announced the estimated 5-month average Consumer Price Index (CPI) to swell 3.01 percent from the same period last year, although it is within the allowable threshold of less than four percent, many economic experts suppose that inflation pressure is returning to Vietnam economy.
The reports of the government, MPOI also mentioned this and emphasized that CPI in May 2018 increased about 0.55 percent from the previous month, the highest increase in five months compared to previous months in six recent years.
“With the gradually increasing CPI trend since the beginning of the year, the room to regulate and control prices in the last months of the year is rather limited, and there needs to ensure the CPI increase at reasonable level, ensuring the target of less than four percent for the whole year”, MOPI emphasized.
Meanwhile, in the latest macro-economic report, NFSC said if the oil price increases an average of about 24-25 percent from the same period, to $65/barrel following the latest forecast of the World Bank, it will cause the price of traffic group to rise about 8-10 percent compared to the previous year, and inflation in 2018 may improve 4-4.1 percent year-on-year.
If the average oil price in 2018 increases 17-20 percent compared to 2017 as forecasted from the beginning of the year (reaching $60-62/barrel), it will cause the price of traffic group to rise about 5-7 percent from the previous year and inflation in 2018 is forecasted to swell about 3.5-3.8 percent from the same period last year.
However, with the current developments along with Fed’s interest rate hike, this year’s inflation is likely to suffer from more pressure. Even, Can Van Luc said it would have been a success if this year’s inflation is maintained at four percent.
