Rising inflation is a key macro risk

Retail prices of gasoline in Vietnam have increased significantly since the beginning of 2022.

According to GSO, CPI remained stable in January 2022 when the food and foodstuff index (F & Fs) was unchanged even in the pre-Tet period. In more detail, CPI modestly rose by 0.19% MoM, much lower than the increase of 1.52% MoM in the previous Tet holiday. The traffic index provided the biggest contribution to the increase in CPI this month, increasing 1.18% MoM as gasoline prices continued to be upwardly adjusted.

Besides, beverage and cigarette (B&C) and garment, footwear, and hat (GFH) rose modestly by 0.57% MoM and 0.26% MoM and jointly added four basis points (bps) to the CPI’s monthly change. Regarding the yearly change, CPI rose by 1.94% YoY in this month, to 2.06%, lower than the government’s target proposed in Resolution 01/NQ-CP on socio- economic development plan and tasks in 2022.

VNDirect’s view, Vietnam's inflation remains low in January 2022 as domestic demand remains weak and has not fully recovered to normal levels before the pandemic.

Due to the Tet holiday, we saw a strong increase in cash withdrawals and payment demand in recent days. As a result, several banks increased demand for borrowing money from the interbank system to support short-term liquidity, which resulted in a sharp increase in interbank interest rates since late January 2022.

According to Bloomberg data, overnight interest rates climbed to 2.2% on February 10, 2022, up 30 bps from the previous month and nearly 100 bps from the end of 2021. The sharp increase in interbank interest rates in recent days is similar to the annual performance during the Tet holiday, and VNDirect expects the interbank rate to decline soon as cash withdrawal and payment demand will return to normal.

"We keep our expectation that the SBV will maintain its accommodative monetary policy until at least the end of 2Q22. Although we do not expect the central bank to lower its key policy rates further, we also do not expect it to raise them in 1H22F in order to continue supporting the economy through loose monetary policy.Nevertheless, we expect the SBV to channel its money market activities via the open market, such as buying foreign exchange or raising the credit growth ceilings. We forecast credit growth to increase by 14% yoy in 2022F", VNDirect forecasted.

VNDirect expects inflation to heat up in the coming months as the transport price index is expected to rise, following a strong rally in crude oil prices. Brent crude oil prices rose to US $96.5/barrel (24% ytd), the highest level in nearly eight years. Following this, retail prices of gasoline in Vietnam have increased significantly since the beginning of 2022. E5 RON 92 gasoline costs VND24,570/liter ( 9.0% ytd, 50.7% yoy), while RON 95 gasoline costs VND25,320/liter ( 8.7% ytd, 46.6% yoy).An increase in gasoline prices will lead to an increase in logistics costs and put upward pressure on the prices of other commodities and services. This is a key macro risk. "We forecast 1Q22F average headline inflation at 2.3% yoy (/- 0.2 percentage points), which is slightly higher than its figure of 1.9% yoy in 4Q21. In addition, we keep our forecast for the 2022F average headline CPI unchanged at 3.4% yoy (vs. 1.8% seen in 2021)", VNDirect said.