Fed’s Likely “Glidepath” is Benign for Vietnam: VinaCapital Chief Economist

The Fed's moves to stabilize its monetary policy is expected not to have a significant impact on Vietnam, according to VinaCapital.

Vietnamese dong (VND) interest rates are unlikely to increase significantly within the next two years as the markets currently only price-in one more interest rate hike by the U.S.’s Fed by the end of 2018 instead of four hinted by the world’s most powerful central bank, said Michael Kokalari, chief economist of asset management and real estate company VinaCapital.

Diminishing expectations for future USD rate hikes, the falling value of the USD, and investors’ increasing confidence in Vietnam – as evidenced by an 80bp decline in Vietnam’s Credit Default Swap rate over the last year – have enabled local policymakers to ramp up monetary policy with impunity.

Money supply (M2) grew 18% year-on-year (yoy) and abundant liquidity led to a plunge in interbank interest rates from 5% at the end of 2016 to 2% at present.

The benign global backdrop enabling Vietnam’s greater reliance on monetary policy is a godsend for local policymakers who have run out of fiscal room to stimulate GDP as the country’s public debt has already reached the statutory 65% maximum and the privatization program is not progressing as quickly as it needs to in order to pay for Vietnam’s 6%/GDP infrastructure spending program.

At the beginning of this year, it seemed highly unlikely that the government would be able to rely on monetary policy to stimulate the economy. At that time, local policymakers fretted about consensus forecasts for a surge in both USD interest rates, and the value of the dollar.

Those concerns prompted the State Bank of Vietnam to steadily devalue the dong all year in order to get “ahead of the curve”. However, instead of appreciating, the U.S. Dollar Index actually fell 5% year to date, alleviating pressure on the VND and leading to a situation in which the free market value of the VND is persistently trading at a value that is more than 1% above the official value of the VND.

This enabled local policymakers – who are vigilant about preserving Vietnam’s macroeconomic stability – to open the liquidity spigots without risking a precipitous drop in Vietnam’s currency like those suffered by Vietnam’s ASEAN peers in recent years.

The caveat to this benign picture is that Vietnam’s transmission mechanism by which loose monetary policy drives increased aggregate demand is imperfect, as evidenced by the fact that system-wide credit grew at a pace of about 1.8x nominal GDP growth in 2016, and approximately 20% yoy in the first five months of 2017.
That said, Vietnam’s outstanding consumer credit is still less than 25% of GDP and local banks’ aggregate loans to consumers grew by about 30% last year, and in the first five months of 2017 (yoy).

“Consumption is two-thirds of Vietnam’s GDP, and banks have ample room to continue growing their consumer loans, so we expect 8% consumption growth in 2017 (comparable to 2016 and 5M17), which should help drive GDP growth of at least 6.3% this year,” the economist said.

As loose monetary policy always raises concerns about the possibility of emergent asset bubbles, Kokalari noted that:

- Credit growth (20% yoy) is comfortably outpacing M2 growth (18%), implying that the banks are lending to the “real economy” rather than fueling asset price increases.

- Vietnam’s stock market is trading at a reasonable valuation of 15x forward PE (versus 15% expected EPS growth).

- Real estate prices are only increasing at about a 5-6% annual pace, the price of mid-tier housing products continue to be affordable for most middle-class buyers, and demand is still strong.

Tuan Minh / BizLIVE