What to promote further interest rate cut?

Challenges to GDP growth

The General Statistics Office recently revealed macroeconomic data that show a fall in Vietnam's exports, imports, and domestic consumption. The huge trade surplus, however, is a bonus because it gives Vietnam a foundation on which to build up USD reserves and keep exchange rates steady. As a result, there is an incentive to pump money into the market because the USD exchange rate continually approaches the rate at which the SBV purchases USD.

Domestic consumption and production take over as the main driving forces when exports and imports drop, particularly when Vietnam's main export products experience a steep downturn. The following problems are raised by Mr. Bau in order to stimulate this industry:

Since private consumer stimulation depends on the permeation of fiscal and monetary policies through interest rate reductions, value-added tax (VAT) reductions, etc., which take approximately 6 to 9 months to have a noticeable impact on the economy, significant expenditure first depends on public investment.

Vietnam's economy will therefore be significantly dependent on governmental investment in 2023. However, with a growth of just around 18% compared to the same period last year and an average of nearly 20% in the first five months, public investment has not yet met the goals and expectations of the entire market. The fact that public investment often grows strongly in the final six months of the year gives us further expectations, despite the fact that the numbers are not particularly encouraging.

Additionally, investment growth in prior years was frequently unpredictable. The rise of public investments has been more steady since 2022, nevertheless. This shows that growth and public investment development strategies are moving in lockstep, which is a substantial improvement over only ten years ago.

Vietnam's economy can reach the government-set goal of over 750,000 billion VND, particularly if the growth rate can be kept at 20–30% through the end of the year. In essence, there are still a lot of difficulties.

Second, in terms of domestic consumption by the private sector, overall growth in the first five months of the year averaged 11%. Although it is better than expected, this growth rate is significantly lower than the 14–15% average growth rate over the previous ten years.

Based on the information from the first two months of the quarter and the projections for June in the production and consumption sectors, we anticipate that the second quarter will see an economic growth rate that is not overly optimistic and may even be below 5%.

The final two quarters will need to increase at a rate of more than 7% even to reach an annual growth rate of around 6%. Given that the government's goal is to achieve a GDP growth rate of 6.5%, this presents a substantial obstacle.

Stable exchange rate, low inflation

When SBV recently pursued an expansionary monetary policy, interest rates were the main issue. Although interest rates have been decreasing in Vietnam over the previous three to four months, the country's economy has yet to clearly demonstrate indications of recovery.

Furthermore, because to the decline in interest rates, Vietnam now has interest rates that are lower than those in the US. This could put pressure on the currency exchange rate and make it more difficult to lower interest rates further.

Inflation is yet another problem. Vietnamese depositors will get a real interest rate of 0% if Vietnam lowers mobilization interest rates to below 4% in a year with 4% inflation. This would result in people investing their money in financial assets and real estate rather than putting it in banks, which would burden the banking system. Interest rates cannot be lowered if the banking system is short of funds and is unable to mobilize funds and extend credit when the economy begins to recover in the following three to six months.

The question of whether inflation is high or low and at what level, as well as the effect of interest rates and inflation on the exchange rate, must therefore be taken into account if further interest rate reductions are sought.

First, based on Mr. Bao's analysis, the inflation factor for May 2023 is stable because of the economy's general price stability, which includes a reasonably quick decline in the cost of transportation and education.

In 2022, the entire economy's prices of goods and services had a sharp rise from the end of the second quarter to the start of the third quarter, but this year, prices are on the down on the whole. We will observe a decrease of inflation if the consumer price index does not rise from now until the end of the year.

This year's inflation will be around 3% or even lower due to a decline in Vietnam's inflation at the end of the year and an increase in inflation in 2022. To ensure positive real interest rates, mobilization interest rates will be reduced to roughly 3-4% on the basis of inflation.

Second, with regard to the currency problem, Vietnam has a sizable trade surplus in a challenging global economic environment, along with some share purchase agreements of significant Vietnamese enterprises, which results in a flow of US dollars into Vietnam and aids in maintaining exchange rate stability.

The typical buying and selling rates of commercial banks are likewise close to 23,400 dong, as is the buying rate of the State Bank, which is roughly 23,400 VND/USD. Therefore, even though it might have been less than 1-2 months ago, the State Bank can still buy USD. So, according to the expert, the economy is not too threatened by the exchange rate.

From the aforementioned criteria, it is clear that Vietnam will have leeway to further decrease interest rates one or two more times if inflation remains low. The exchange rate is also unaffected by changes in interest rates or by the fact that Vietnam's interest rates are often lower than those in the US. This is supported by the significant inflow of US dollars that entered Vietnam in the first half of this year and is anticipated to continue for the next two to three months.