Pressure on to support new economic growth

The latest move from the Fed marked eight consecutive rate hikes since March 2022, with no signs that it has reached the peak of its hike journey. Assoc. Prof. Dr. Dinh Trong Thinh, a financial expert from the Vietnam Association of Financial Advisers, predicted that a rate hike of 25 percentage points was anticipated. Thinh stated that, in general, the pressure on the USD/VND exchange rate from the Fed's interest rate hike is not significant.

Pressure on to support new economic growth, photo Le Toan

Dr. Le Dang Doanh, former head of the Central Institute for Economic Management, also believes that the Fed's interest rate rise is targeted to contain inflation in the US, since inflation has begun to fall from the previous year's low level. The USD price will adjust as a result.

"A change in the price will influence the exchange rate between it and VND, impacting import-export businesses and foreign-invested enterprises," said Doanh.

On the other hand, deposit interest rates at some commercial banks in Vietnam have showed signs of cooling down, down from 0.1 to 0.5 per cent per year compared to the end of 2022. Experts believe that interest rates cooled partly because of banks' weaker demand to lure deposit money. Therefore, banks will not need to mobilise as much as at the end of last year.

At the end of January, Prime Minister Pham Minh Chinh called for commercial banks to lower lending rates. SSI analyst Trinh Thai, however, expressed her concern that this is not an administrative level request. "The call is likely more the form of a directed communication to boost market sentiment. In reality, we observe that deposit rates for terms over six months were being lowered at some banks during January, though the reduction level is marginal, at only about 50 basis points (bps)."

Currently, deposit rates are ranging from 8-9.5 per cent per annual for regular depositors, but lending rates have not moved yet, still at around 12-15 per cent annually, Thai added.

"Depositors might find this time period to be calming to mark the peak of deposit rates that had spiralled ever higher during 2022. We also do not think there will be another pressing liquidity constraint that has sent interbank rates soaring, as seen in late 2022," Thai said.

Having, Thai explained, medium-term systemic liquidity has still not yet improved, while default risks remain for the corporate bond market. "While the peak in rates might be soon over, if not already, deposit and lending rates will likely not see a significant downward adjustment throughout 2023," she said.

On the flip side, Hoang Thi Minh Huyen, a macroeconomic analyst at Bao Viet Securities, predicted, "The pressure to support economic growth next year is huge, so it is also one of the factors that cause interest rates to drop to support economic growth. For the whole of 2023, interest rates will decrease by about 50-100 bps."

Regarding inflation in Vietnam, an expert at HSBC Vietnam told VIR, "While yearly headline inflation was relatively low at 3.2 per cent, Vietnam continues to see stronger inflation pressures. December was the third consecutive month of inflation overshooting the State Bank of Vietnam's (SBV) 4 per cent ceiling."

Not only has core inflation accelerated to 5 per cent on-year, but Vietnam has also seen elevated prices for raw materials. This means the SBV will likely continue its tightening cycle. As the last central bank in ASEAN to move, the SBV has been actively playing catch up, hiking by 200 bps in 2022, the expert added.

"While we expect the SBV to slow its monetary tightening pace as the Fed is expected to slow and FX volatility has eased, its hiking cycle will be still underway. We expect the SBV to raise its refinancing rate by 50 bps each in the first half of 2023, taking the refinancing rate to 7 per cent," the HSBC expert noted.

Standard Chartered also forecasts USD-VND at 23,200 by the end of Q1 and at 23,500 for mid-2023, while its H2-2023 forecasts remain unchanged. An improving current account balance backdrop and tourism recovery is likely to be supportive of the VND, Standard Chartered said, while FX volatility will remain elevated, and a wider trading band will allow for more FX flexibility.

According to Standard Chartered's FX Alert, the combination of an earlier-than-expected China reopening, signs of softening inflationary pressures in the US, and one-way market positioning have led to a sharp rally in ASEAN currencies versus the USD in recent months.

However, the performance has diverged significantly in the region. The bank expects such uneven performance to lead to relative-value opportunities within the region against a backdrop of a more nuanced outlook for USD. Standard Chartered revised its FX forecasts lower to consider positive themes that have emerged in recent weeks, particularly the reopening of China.