The US Federal Reserves (Fed) plans to raise interest rate three times in 2018 and the rate may reach 2.1 percent in the end of the year. Fed’s current rate is 1.25%-1.5%.
Dr Can Van Luc, Chief Economist of Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV) talked to Nhip Cau Dau Tu newspaper that the Fed is likely to increase interest rate one time in 2018 instead of three times as forecasted.
According to Dr Luc, the amount of money injected into the US economy is fairly large from the policies of President Donald Trump, while wages are rising fast and the dollar is weakening. This could be the reason making the Fed to raise interest rate to higher level to control inflation below 2 percent as targeted.
In fact, the impact from the Fed’s interest rate hike is no longer as strong as before, as the impact is clearly outlined in the policy and there are early forecasts of prices.
However, if the Fed increases interest rate too fast, Dr Luc believed that there will be certain shocks to the global financial market. At that time, the money will be tightened, liquidity in the world financial market will be affected and the USD interest rate will therefore go up.
Interest rate and exchange rate are the most unpredictable variables in operating monetary policy and stabilising the macro economy of Vietnam. If the Fed makes one more interest rate hike, Vietnam will suffer three impacts, said Dr Luc.
Firstly, it is very difficult to lower interest rates. The recent resolution of the government sets the goal of further lowering interest rates in the context when inflation must be controlled below 4%. In 2017, the mobilisation interest rates in dong on terms of over 12 months were popular at 6.4-7.2%, and the lending rates to priority areas fell by about 0.5-1 percent compared to the beginning of the year, but interest rates on normal business and production areas were still ranging around 6.8%-11 percent per annum.
Secondly, there is pressure on shifting the cash flows. The cash flows may shift towards investment flows if the investment environment of Vietnam is not good. For example, money can be poured in new investment destination with higher profitability and acceptable risk level.
Thirdly, there is pressure on the exchange rate. Currently, the growth of developing countries is higher than the US’s. It means that the currencies of developing countries are strongly appreciating, while the US dollar is difficult to go up or even is slightly depreciating.
Report on the financial and economic situation and the 2018 prospect of the National Financial Supervisory Commission (NFSC) showed that in 2017, the exchange rate of dong against US dollar was fairly stable but the interest rate gap remains large at around 6%-7%.
The USD/VND may be raised by about 1.5%-2 percent in 2018, forecasted by the NFSC based on the scenario of the Fed raising interest rates three times this year.
The financial market is heavily influenced by interest rates. Dr Luc believed that Vietnam should still keep interest rates stable this year, although interest rate is not the main obstacle for the operation of enterprises as lending grew by 18.2 percent in 2017 and 3.5 percent in the first quarter of 2018.
With the scenario of the Fed raising interest rates four times this year, Dr Luc said that active analysing and assessing impacts is important, but the more important thing is to enhance the ability to withstand external shocks.
In order to do so, Vietnam must take the opportunity at present to further restructure the economy and enterprises. Particularly, concerning the stability of the monetary and financial system, bad debts must be more thoroughly handled.
Dr Luc also said that the foreign exchange reserves should be increased to five or six months of imports. Currently, the foreign exchange reserves is around 57 billion USD, equivalent to three months of imports, according to announcement of SBV on February 6th.
Thus, if the Fed once again raise interest rate, the impact on rising costs of government’s foreign loans is very large. The outstanding foreign loans of the government, as of December 31st 2016, were 947.494 trillion dong, equivalent to about 42.938 million USD, up compared to 2015, accounting for 39.8 percent of the government debts, according to report of the State Audit announced in early March 2018.
