Interest rates could keep going down this year.

The multiplier impact of infrastructure investment

According to the General Statistics Office's August report on economic and social situations for the first eight months of 2023, the Consumer Price Index (CPI) for August 2023 increased by 0.88% compared to the previous month, and the average CPI for the first eight months of 2023 increased by 3.1% compared to the same period last year. The core CPI increased by 4.57%. Total retail sales of products and consumer services in August were 515.4 trillion VND, a 0.9% increase over the previous month and a 7.6% increase over the same period last year.

Many analysts believe that economic growth in August improved somewhat compared to the previous month, however we believe this is a little gain. Among the components of growth, the retail sector for products and consumer services is solid, accounting for 40% of the total and growing at a 10% annual pace. Going into the retail sector, there are lesser components, such as retail sales of products growing by 8.7% with a significant proportion of almost 3.1 trillion VND; nevertheless, travel and tourism increased by 47% with a much lower share of just 22.4 billion VND.

As of yet, the government has not revised its growth objective and has maintained the number of 6.5%. A plus is that, as is customary in the third and fourth quarters of each year, GDP will contribute considerably to the economic takeoff.

The lens of public investment can help explain why retail and consumer goods services are increasing so rapidly. Despite not yet meeting the objective, the pace of increase in public investment this year will exceed that of last year, according to the plan. The southern areas, in particular, are displaying significant disbursement rates, with the highest being about 73.33%, particularly in the transportation infrastructure sector, with a number of new motorways opening.

The dispersal of public investment will result in a notion known as the fiscal multiplier effect, which is linked to government expenditure. When the government raises expenditure on infrastructure projects such as bridges and roads, it creates jobs for businesses. This enables businesses to pay workers' wages, hence raising household income and consumer spending and influencing other areas of the economy. This generates a loop since these businesses also interact with homes and so prolong the cycle. GDP growth is generated by this repeated process.

According to estimations for the year 2021-2025, increasing public investment disbursement by 1% over the previous year might grow GDP by an extra 0.058% the following year. Economists have offered a specific amount.

Based on current statistics, AFA Capital's CEO predicts that Vietnam's GDP will expand by slightly more than or slightly less than 5% in 2023. This projection may appear dismal, but as investors, we must analyze the facts.

With GDP growth at this rate, he anticipates that monetary and fiscal policy would be tightened further. Similarly, with the present growth drivers, GDP growth in the third quarter is expected to be about 5%.

Exchange rate reaching new heights

According to the General Statistics Office, goods exports climbed by 7.7% in August compared to the previous month. When compared to May (4.3% rise), June (4.5% increase), and July (0.8% increase), August's growth is rather encouraging. This suggests that firms' trade marketing and market research activities have generated beneficial outcomes.

Furthermore, overall export and import turnover of products was projected at $60.92 billion in August, up 6.7% from the previous month but down 7.9% from the same time last year. The first eight months' trade surplus is anticipated to be $20.19 billion.

Many experts said, this "trade surplus" result isn't all that encouraging because export and import quantities have declined by 10% and 16.2%, respectively. Vietnam's economy, on the other hand, is strongly reliant on exports and foreign direct investment (FDI).

As a result, the problem of exports and imports is critical, and it is difficult to interfere in this sector since it is fully dependent on foreign market demand. With Vietnam's two main import partners, the US, and recent adverse news from Europe, there is reason to be wary. As a result, the newly declared rebound is only a reversal and does not yet suggest positive GDP growth from now until the end of the year.

Furthermore, currency rates are highly tied to exports and imports. Although exports have begun to rebound, exchange rates are on the rise. The exchange rate has been largely stable since the beginning of the year, following the adjustment around the Lunar New Year. The next high point of the currency rate might be around 25,000 VND/USD.

It is vital to remember that the interest rate disparity between the USD and the VND is rather large. People also expect US interest rates to climb further following the Jackson Hole summit. While Vietnam's total balance of payments is positive at more than $20 billion, given the foreign exchange condition of the whole banking system, there is still a need to acquire more to limit  risks or speculative activity.

Many people are wondering if the State Bank of Vietnam would adjust its interest rate policy if the Vietnamese currency appreciates considerably this year. In Mr. Nguyen Minh Tuan's view, this is unlikely to happen because the trade balance is positive and exports have recovered from the low point. The trade balance is likely to stay positive in the future, therefore the issue of currency rates, while it may rise, should not be a big concern.

Particularly in the last eight months, with inflation at 3.1% - well below the National Assembly's objective - there is still room for exchange rates and inflation to absorb, allowing interest rates to remain the dominant trend this year.