SBV is expected to restrain policy rate hikes in 2024

Mild inflation forecast

According to Maybank, Vietnam's headline inflation would rise to 3.5% in 2024 and 3.4% in 2025 (from 3.3% in 2023). Inflation is expected to continue below the State Bank's target range of 4%-4.5%.

Rising consumer demand will sustain prices, but they should be managed by policies such as a 2% drop in value-added tax (VAT) and other tax and fee cuts. Concerns about energy costs remain, however the recent increase in power rates is projected to have a minor impact, with a 10% increase amounting to a 0.33% increase in consumer prices. On November 9, Vietnam power (EVN) raised the average retail power price by 4.5%, after a 3% rise on May 4, 2023. In terms of its influence on inflation, the increase is not regarded worrying.

Transportation inflation (9.7% in the CPI basket) is expected to be restrained by steady oil prices (Maybank forecast: $85 per barrel in 2023; $80 per barrel in 2024). However, transportation's contribution to total inflation may rise in 2024, after being essentially negative in 2023. Transportation inflation impacted on the CPI index from February to August 2023, but the rate of growth has since slowed, with positive adjustments seen from September to November due to the declining influence of oil price increases.

Even with greater demand boosting food prices, food inflation (33.6% in the CPI basket) is projected to be contained due to positive variables such as suppliers. Due to record-high wheat output, the World Bank predicts global grain supplies to increase in 2024. The United States Department of Agriculture (USDA) forecasts a 5% increase in Vietnamese pork output to 3.7 million tons. However, there is a chance that El Nio would disrupt global food supply and cause higher-than-expected food prices in 2024.

Risk if interest Rates are higher

Maybank anticipates that the State Bank of Vietnam will maintain its policy interest rate in 2024. The policy rate was decreased by -150 basis points in 2023 and is not likely to be reduced further when the economy improves. Foreign exchange pressure also limit s the central bank's capacity to decrease interest rates further while the Fed continues to boost rates. The Fed is not expected to lower interest rates until the third quarter of 2024.

The State Bank of Vietnam may limit  interest rate increases since inflation is expected to continue below the 4% objective and asset reductions remain a worry. Risks include higher-than-anticipated inflation and a considerable depreciation of the dong, which might occur in October-November 2022 if the Fed becomes more hawkish than projected.

In July 2023, the expert panel also cautioned that the State Bank's dependence on monetary policy easing might "reveal bad debt instability and the system's safety over the following few years." Once the headwinds have subsided, this might signal a trend toward normalizing policy interest rates.

Factors affecting GDP to note

GDP concerns include global growth uncertainty and increasingly severe risks from developed nations, which might flow over into the financial sector. Higher US interest rates, as well as an escalation of the Hamas or Ukraine war, might distort the recovery in the long run.

Supply chain disruptions might add to commodities price shocks. Tightening global policy and financial conditions may limit  FDI and capital inflows, weaken the currency, and cause the State Bank to hike interest rates.

A more severe asset crisis might have far-reaching ramifications for banks, despite the fact that the banking system's loan exposure to real estate developers is only 7%—a manageable amount. Some banks, however, incur much larger risks. In the worst-case scenario, the failure of a large developer might have a significant influence on the quality of bank assets and result in scared purchasers, aggravating the real estate crisis.