State Bank rate hike needed to defend VND and control inflation

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“Another important economic policy achievement in Vietnam has been to maintain macro-economic stability,” Jeffries said.

According to him, through the pandemic and also through the economic shocks this year, including global inflation, the fallout from the conflict in Ukraine and the risks of recession, Vietnam has managed to control inflation this year, despite the enormous energy pressure, the commodity price spikes in the global economy.

He went on to say that the monetary policy measures taken by the government have greatly contributed to this success, keeping the money supply and credit in check, coping with the pressure for a stable exchange rate while supporting the business access to financial resources for recovery.

“This is a very delicate balancing act and the State Bank of Vietnam should be rewarded for it,” the AfDB official said.

As for the risk of capital outflows following rate hikes by central banks around the world, Jeffries said Vietnam is relatively less affected than many other countries in Asia.

He explained that first of all, Vietnam does not have a large public debt in international bond markets and has a relatively low level of public debt at 43% of GDP. Capital controls restrict overseas portfolio investment or speculative capital for rapid inflows and outflows from the Vietnamese stock market.

According to him, aggressive monetary tightening by the US Fed will trigger short-term capital outflows, but foreign direct investment or FDI remains healthy in Vietnam due to the country’s strong medium-term economic fundamentals.

He underlined that it is very important to consider that FDI is long-term, it does not go up and down depending on economic shocks. And Vietnam has strong economic fundamentals and will remain an attractive destination for FDI.

Jeffries said Vietnam’s Sept. 22 rate hike of one percentage point is an example of decisive action that is needed in this environment where the Fed, ECB and a number of countries have very recently hiked rates. , Vietnam following suit to keep the dong stable and it was tough but the right thing to do.

A stable Vietnamese dong is essential for Vietnam to support trade and also contain inflation, he said, noting that a depreciation of the dong would make imported goods more expensive and worsen the account balance and possibly the balance. payments.

Vietnam also imports a lot of intermediate goods and does the final reassembly for re-export. A stable dong is therefore important to keep prices relatively low for these important imports which are essential inputs for Vietnam to export, according to Jeffries.

He noted that high inflation in major economies and tighter monetary policy around the world are weakening global demand. Vietnam is an open economy, which means that this trend could carry over to Vietnam’s exports.

Another issue is labor shortages, which could hamper the recovery of services in the labor-intensive export sector.

“Thus, the recommendations include that Vietnam should continue to maintain flexible monetary policy and closely monitor the global economic situation. The aggressive rate hike that the State Bank of Vietnam has just implemented is a decisive action in response to the extremely volatile global situation, intended to defend the dong and contain inflation,” said the country director of the AfDB.

He added that targeted fiscal support for the most vulnerable group may be needed if inflation rises. Prior to this rate increase, the State Bank of Vietnam used the line of credit limit to solve the problem that imposes a ceiling on the amount of credit to financial institutions.

It has worked, but as we have shown in recent days, it is time to move to more market-oriented instruments, such as raising rates, to promote sound development of the financial sector in the longer term, according to Jeffries.

He said that regarding the fiscal component, Vietnam’s economic recovery development program has many exciting and innovative features to help enterprises and businesses recover from the pandemic and current shocks. Implementation needs to be accelerated and re-targeted to those in need rather than being too broad to avoid limiting and abuse of the problem.

In his view, in the longer term, the priority should focus on improving the overall business environment, which has come a long way, but it is a gradual and continuous process that must continue.

He recommended measures such as removing obstacles for businesses and simplifying administrative procedures to reduce transaction costs.

The AfDB country director said the good news is that Vietnam’s growth this year is very strong, with the AfDB projecting 6.5% while others forecast even more, and so despite the ongoing risk in the globally, Vietnam’s strong fundamentals make Vietnam relatively resilient in a more challenging global environment./.

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