The State Bank of Viet Nam (SBV) might not increase its policy interest rate in the first quarter of 2023 after the US Federal Reserve (Fed) raised its rate by only 25 basis points last week while the Vietnamese dong has strengthened against the US dollar, analysts forecast.

According to analysts from financial data provider FiinGroup, the dong has strengthened by about 5 per cent against the dollar since the beginning of December 2022 as the Fed has slowed rate hikes and China has reopened.

After the Fed’s decision last week, the analysts forecast the SBV may adopt a wait-and-see approach until the end of the first quarter of this year before making the next interest rate hike. The SBV last year had to increase its policy rates twice with 100 basis points each consecutively in September and October due to the weakening of the dong after the Fed’s sharp rate hike and inflation risks. The rediscount rate was raised from 2.5 per cent to 4.5 per cent per year and the refinancing rate was increased from 4 per cent to 6 per cent.

However, they noted, there are still risks if the Fed continues to be hawkish in the rate hike pace or if the US inflation remains high at more than 4.5 per cent for a long time as China reopens.

Therefore, FiinGroup’s analysts said they currently still maintain a base scenario of a 50 basis point interest rate increase in 2023, but noted it will be after the first quarter.

Analysts of BIDV Securities Company (BSC) last week also said as Viet Nam’s inflation is on the rise and the Fed may increase interest rates by 75 basis points in 2023 according to the current plan, they forecast the SBV may increase interest rates by 50-100 basis points in 2023. The hike will directly influence the amount of cash flows into Viet Nam’s economy.

With the above forecast, the BSC’s analysts predicted two main scenarios for the country’s interest rate, credit growth and the money supply (M2) in 2023.

In the first scenario, Viet Nam’s inflation rises high and the Fed hikes interest rate by more than 75 basis points, which may cause the SBV’s policy interest rates to increase by 100 basis points. In addition, if the corporate bond market recovers slowly, the M2 and credit growth rates will be lower than those in the 2020-21 period. The growth rates for M2 and credit rates are estimated to increase by 6 per cent and 10 per cent in 2023, respectively.

In the second scenario, Viet Nam’s inflation is under control and the Fed raises interest rates by 75 basis points, which may cause the SBV’s policy interest rates to increase by 50 basis points. Besides, if the corporate bond market recovers fast, the M2 and credit growth rates will be higher than those in the 2020-21 period, to reach 12 per cent and 14 per cent in 2023, respectively.

Foreign exchange rate

Under the report, BSC’s analysts said the foreign exchange rate rose strongly in the second half of 2022 after the Fed accelerated the tightening of monetary policy. The foreign exchange rate reached VND23,633 per US dollar by the end of 2022, up by 3.4 per cent against the beginning of 2022.

The sharp increase in the foreign exchange rate was due to the narrowing gap between the US dollar and dong interest rates, which put strong pressure on the market valuation of dong. Besides, the reduction of the foreign exchange reserves during the stressful periods in the second and third quarters of 2022, mainly due to the withdrawal of foreign capital from Viet Nam’s economy under the upward pressure of the US dollar in the world, also caused the dong to devalue against the dollar in 2022.

However, Viet Nam’s foreign exchange rate remained fairly stable compared to that of other countries. These results show the stability of the foreign exchange rate and eased the concerns about the withdrawal of foreign capital flows from Viet Nam’s economy.

BSC’s analysts forecast the nation’s foreign exchange reserves will remain abundant in 2023 based on three factors.

Firstly, the trade surplus is expected to continue in 2023 and can reach US$13-15 billion when macro factors are still supporting the trend.

Secondly, the remittances are estimated to increase by 4.4 per cent on average for the past three years and can reach $19.7 billion in 2023.

Lastly, the SBV will maintain its stable exchange rate management policy and may purchase the US dollars when there are favourable conditions such as inflation being under control and the Dollar Index being adjusted down after a strong bull cycle in 2022.

According to BSC, there are two possible scenarios for the foreign exchange rate in 2023.

In the first scenario, the exchange rate will be VND24,400 per US dollar, up by 3.2 per cent year-to-date. This case happens when the Fed raises interest rates to more than 5.25 per cent per year, while Viet Nam’s inflation is 5.1 per cent and the country’s tourism industry recovers slowly.

In the second scenario, the exchange rate will stay at VND23,900 per US dollar, up by 1.1 year-to-date. This case happens when the Fed maintains the interest rate at 5.25 per cent per year, while Viet Nam’s inflation is below 4.5 per cent and the tourism industry recovers rapidly.

Meanwhile, the FiinGroup’s analysts forecast the foreign exchange rate will stand at VND22,900 per US dollar by the end of 2023, against its previous forecast of VND24,200. — VNS