Vietnam’s fiscal policy can perform a stronger role

How does China’s slow economic recovery affect Vietnam’s economy in the forthcoming time?

Suan Teck Kin, head of Research at UOB

China is Vietnam’s second-largest export market, and as such the economic performance of China will have an impact on Vietnam.

Despite disappointing growth momentum in China, Vietnam’s exports there have been positive in the past three months, after declining on-year for the previous six months. This suggests China’s demand for Vietnam’s products remains strong.

This development has helped to offset declines in exports to the US, which has been declining on-year for since March. It highlights the crucial need to diversify export markets and products to spread out the risks to different markets.

High interest rates and costs in the US economy have led to slow consumption, which has significantly affected Vietnam’s exports to the US. How do you forecast Vietnam’s exchange rate situation by the end of the year?

In terms of the exchange rate, we expect VND to strengthen slightly against the USD towards the end of 2023 and early 2024, to around VND23,800 by the end of Q1 next year.

This assumes that the US Fed will start to lower interest rates from that period. However, as Vietnam is heavily dependent on exports, and to protect competitiveness, the VND may not be able to strengthen significantly.

Should the State Bank of Vietnam (SBV) continue to reduce interest rates in the context that countries are still tightening their currencies?

Lower interest rates can help support spending and corporate investing

There is room for SBV to lower interest rates further, as inflation rate has slowed to below the target of 4.5 per cent. However, core inflation remains quite elevated at 4.1 per cent in the latest reading, and this means that the SBV will approach rate cuts cautiously.

Nonetheless, domestic demand is the main driver for growth due to weakness in exports. Lower interest rates will help to support spending and corporate investments, and ensure economic growth will be maintained at a reasonable pace.

The SBV and Vietnamese banks have continuously softened interest rates to aid business development, yet local credit growth remained low in the first months of the year. The main cause is the lack of confidence from businesses and consumers, as external demand stays weak and orders decline from some of the main export markets, especially the US.

One solution is for the government to accelerate its investment spending that is already budgeted for the year, in order to boost business activities and confidence.

There are opinions that Vietnam’s monetary policies focus too much on economic rebound and development, while fiscal policies are performing quite slowly. Is this the case?

The disbursement of the government budget has been slow and therefore there is space for the fiscal policy to perform a stronger role.

For the SBV, like many central banks around the world, it cannot be faulted for doing its job to ensure a balance between growth and price stability.

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