Tailwinds for Vietnam’s economy

Vietnam's economy is maintaining a strong position against the current inflation shock. Photo: HCM City.

Vietnam could become a potential beneficiary thanks to its great competitive advantages in attracting FDI and FII investment in the period of 2022–2023 and in the long term. In Kis Vietnam's view, such an argument is based on the following:

First, thanks to the upcoming fiscal- monetary expansion, there is a high possibility that Vietnam will become one of the bright spots in the world economy in 2022–2023 versus other emerging markets and developing economies. With the economy expected to grow by 7.4% in 2022 and 6.7% in 2023, Vietnam is among the top countries with the highest potential growth after the pandemic, returning successfully to the pre-pandemic long-term growth trend.

In addition, Vietnam's inflation would likely remain stable at a safe level (lower than the 4% target), with inflation expected in 2022-2023 during the rapid economic recovery period at only 3-3.5%. Besides, in terms of the monetary policy path in the near term, SBV is likely to continue implementing easing monetary policy in the next 2 years in order to harmonize with the upcoming fiscal support package. Except for a special situation where the PBoC may have to implement further monetary easing to support the weak economy (due to the recent housing crisis), macro indicators and economists' expectations show that Vietnam is among a few countries that could preserve the easing fiscal-monetary policies in the next 2 years.

Second, a strong foreign reserve would be a huge advantage for SBV to stabilize VND in the stronger USD environment. Data showed that SBV’s foreign reserves increased markedly in 2018–2021, reaching nearly USD107bn thanks to a huge trade surplus in this period, equivalent to total foreign reserves in months of imports of approximately or above 4 months. Furthermore, VND is also a currency that holds two tremendous advantages versus other currencies, including (1) exhibiting low volatility compared to other currencies, as the standard deviation of VND daily changes in the highly volatile market conditions during 2020-2021 was just 0.19%; and (2) only VND and CNY appreciated against the greenback in 2020–2021, and VND is expected to further appreciate in 2022–2023.

Third, Vietnam's economy is maintaining a strong position against the current inflation shock, thanks to its well-structured economy and cost-push goods inflation. To be more specific, the structure of Vietnam's economy is export-oriented for goods and agricultural products, which means it is considerably less vulnerable to goods and foodstuff inflation pressure. Besides, the government also has effective tools to control inflation in some other sectors, such as healthcare, education, and utilities. In addition, other government policies, including a 2% VAT reduction for most products (Decree 15/2022/ND-CP) along with the resolution bill on the environmental protection tax for oil and petroleum products, will be protective factors in restraining inflation pressure in 2022. Besides, data for sales for a large part of the services sector is showing still-weakened demand, and the impact of pent-up consumption demand is currently not visible in a large part of services activities.

It can be affirmed that policymakers have effective tools to reduce pressure on inflation in the short term, and a number of them are being implemented soon in 2022. Keep in mind that most global monetary authorities expect global supply bottlenecks to be eased by 2H22, which means global inflation pressure may be at its peak in 1H22. Having the advantage of effectively controlling the impact of global inflation shock pressure on domestic inflation, production, and consumption in 2022-2023 will be a great advantage for boosting exports and attracting FDI and FII investment.

Fourth, the consumption demand of major export partners is expected not to be strongly affected by the global monetary tightening process. With the economy dependent on export-oriented goods, Vietnam's economy will considerably depend on the strength of consumption demand from major export markets, including China, Japan, South Korea, and especially the U.S. and European Union (two major markets for global final consumption). Only the Bank of Korea is conducting early tightening among these countries, and the Fed is preparing for this tightening process beginning with the upcoming March FOMC meeting.Meanwhile, the Bank of Japan, the European Central Bank, and the People's Bank of China are very likely to maintain their current super-easing monetary policies at least until late 2023.

"It is certain that global central banks will be in a difficult situation in conducting monetary policies during the time of many uncertainties about future developments of the pandemic, potential escalating geopolitical tensions, and how severe the ongoing inflation shock will evolve in 2022–2023," Kis Vietnam said.

Advanced economies with economic growth recovering to their long-term potential economic growth (such as the US, Canada, and the UK) and experiencing decades-high inflation will be under pressure to end the ultraeasing monetary conditions in 2022 - 2023. Some other regions, including South America's emerging markets with high inflation pressure (typically Brazil and Mexico) and other areas affected by geopolitical tensions in Russia-Ukraine (typically Russia, Ukraine, Poland, Czech Republic, Hungary, etc.), will run aggressive monetary tightening to cope with escalating inflation even though these economies have not fully recovered.

Other developed countries, on the other hand, that have not recovered to their pre-pandemic long-term potential growth, typically Japan and the European Union, will continue to maintain ultra-easy monetary policies in order to stimulate the economy.For the emerging and developing countries that were heavily impacted by the COVID-19 pandemic during the 2H21 period, and in the case of China with the recent housing crisis, those central banks will likely remain unchanged or further loosen, including China, Vietnam, and Thailand.

With Vietnam's economic growth considerably dependent on FDI inflows as well as consumer demand in major export markets (including the U.S., EU, Japan, South Korea, and China), Kis Vietnam strongly believes that the impact of the monetary decisions of those central banks in 2022 and 2023, as well as "surging inflation - monetary less easing - slower economic growth" global trend, will not have a great impact on Vietnam's economy. On the contrary, Vietnam could become a potential beneficiary thanks to great competitive advantages in attracting FDI & FII investment in 2022 - 2023 and in the long term.