On November 3, the Federal Reserve hike rate hike rate as scheduled for the fourth time, raising the interest rate to between 3.75% and 4.00%. This is the sixth interest rate hike this year and the fourth consecutive rate hike rate 75 basis points. It also stated that further interest rate hikes are needed to fight inflation, and the interest rate peak will be higher. It is too early to discuss when to suspend interest rate hikes. This also means that the Federal Reserve, which is regaining its credibility, may have to continue to increase interest rate expectations.
According to market forecasts, the peak interest rate in May 2023 has soared to a new high of 5.10%, higher than the Fed's dot chart expectation of 4.62%, which made the Vietnam market chill.
As a countermeasure, the Vietnamese central bank has urgently announced on October 25 that it would raise the refinancing rate by 100 basis points to 6%, and is the second consecutive major interest rate hike in a month to fight the sharp decline in the local currency, protect the banking system, curb inflation and increase in financial risks. This is a very rare monetary tightening policy, which surprised investors.
In addition, the central bank of Vietnam will also increase the upper limit of deposit interest rates for commercial banks by 50 to 100 basis points based on the maturity period. You should know that since the end of 2020, the central bank of Vietnam has maintained its key interest rates unchanged. This alone shows that Vietnam's economy and financial markets are facing great pressure to harvest risks after being aggressively raised by the Federal Reserve.
And on October 17, the Vietnamese central bank announced that it would expand the Vietnamese dong trading range from 3% to 5%, which shows that the Vietnamese authorities are willing to tolerate the further weakening of the Vietnamese dong, and further shows that Vietnam seems to have insufficient reserves to defend the Vietnamese dong.
On November 3, the Vietnamese Dong fell sharply by 5% in the last four weeks after the Vietnamese central bank expanded the daily trading range of local currency exchange rate to retain the declining US dollar reserves. According to CEIC, the country's core inflation rate reached nearly 4.5% in October, at least the highest since early 2015. Note that Vietnam's inflation rate averaged only 2.58% in the first eight months of 2022, but under the surface of these data, things have started to become more disturbing.
In order to defend the exchange rate , the Vietnamese central bank sold a large number of dollars. However, in the context of the current policy of hiking interest rates by the Federal Reserve, Vietnam's limited foreign reserve moat is not enough to support the "monetary defense war". As of the nine months ended in October, Vietnam even sold 20% of the position ratio of US bonds, and currently holds less than 40 billion US dollars, and is actively de-dollarization.
Malayan Bank estimated in a report released on November 2 that the central bank of Vietnam has sold at least $35 billion in foreign exchange reserves since October 1, which makes its foreign reserves likely to drop to around 80 billion. According to data provided by IMF in June, Vietnam's foreign reserves are close to a record $110 billion. Quarterly data provided by
CEIC also shows that as of October, Vietnam's foreign exchange reserves were only equivalent to its import volume for more than three months, and an emergency warning was issued. In contrast, in August, Indonesia's foreign exchange reserves were equivalent to its import volume for more than five months, while Thailand and Philippines were seven months.
Not only that, two weeks ago, Vietnam's banking industry broke out in a bank run, highlighting the characteristics of this Southeast Asian country's economic growth, but the financial industry is very fragile. Against the backdrop of Vietnam's monetary policy and the continued tightening of the financial environment, the outside world is speculating which company will be the next storm in the country. An financial crisis is sweeping Vietnam.
November 3, under the rising inflationary pressure and currency depreciation environment, Vietnam's stock market also suffered a heavy blow. Vietnam's major stock indexes fell by more than 1.2% again as of press time, hitting the lowest level since January 2020 during the session.
In this regard, FocusEconomics, a senior analysis agency in the global economy, said that the core crux of the fragility of Vietnam's financial system is to fall into the US dollar debt trap and want to exchange interests with Wall Street Group.
data shows that as of October 31, the total debt in Vietnam's banking system increased by 11.07% compared with the end of 2021, and the credit growth will reach 15.9%. As of September this year, the total amount of all external debt in Vietnam was approximately US$175 billion, and the total amount of foreign debt reached 173% of the proportion of the international reserve assets of the , and the proportion of Vietnam's fiscal foreign debt reached 47%, and it is still expanding.
This shows that Vietnam's debt repayment costs have begun to increase exponentially, and the default risk soars, and it is very likely that the wealth will be harvested by US capital, which makes Vietnam's stock, bond and foreign exchange markets have a risk of bursting. This will become more obvious in the context of the crisis in Europe and the economic and financial markets, because most of the profits of Vietnam's manufacturing industry are in the hands of European and American manufacturers, which also causes a large number of wise investors to withdraw from the Vietnamese market in advance.
The United States, as Vietnam's largest export market, is significantly reducing demand for Vietnamese goods, including agricultural products, and the United States and Europe's high fever and supply chain shortages have also spilled into all aspects of Vietnam's domestic production activities and are driving a soar in Vietnam's inflation.
If the United States falls into a recession, the situation in Vietnam may become more difficult. The country may have to expand its exchange rate trading range again and tolerate further depreciation of its currency while continuing to raise interest rates, which is a major challenge for Vietnam's economy and financial markets, while also needing to address the risk of non-performing loans.
Vietnam National Bank
Data shows that Vietnam experiences a financial tsunami storm almost every decade. Although Vietnam has achieved growth in more than ten years, and is even called an Asian economic miracle, it mainly relies on accumulating risky loans and soaring foreign debt to expand economic growth, significantly exceeding the growth of GDP and has been listed by HSBC as one of the countries in Southeast Asia that most need to consolidate its finances.
This will become clearer in the context of the Vietnamese central bank responding to the continued aggressive interest rate hikes of the Federal Reserve, which will have to continue hikes in response to inflation and financial storms. This shows that Vietnam's debt repayment costs and stock, bond and foreign exchange market risks have begun to double, and it is very likely to be harvested by the United States, a "modern financial pirate". What awaits Vietnam's economy and financial markets may be surging waves.
Considering that Vietnam is no longer able to cope with the continued rise in US dollar lending costs, which will intensify the volatility of the Vietnamese market and squeeze out international investment. The Vietnamese market, known as the Internet celebrity stock market, has a real possibility.
According to data from Refinitiv Eikon, as of the eight months ended November 1, international funds with a sensitive sense of smell were quietly withdrawing from the Vietnamese financial market, and foreign investors have sold up to 1300 trillion Vietnamese dong assets, almost 5.3 times that of the same period in 2021. For example, most of the profits in Vietnamese factories are in the hands of European and American manufacturers, but with the global economic development, some European and American companies are withdrawing from the Vietnamese market.
Immediately afterwards, the IMF warned "Vietnam pays attention to inflation and financial risks" in a report released a week ago. If it cannot solve its own dollar debt trap, coupled with Vietnam's backward economic infrastructure, rapidly rising corporate labor costs, land costs, private debt burdens, soaring financing costs, difficulties in raw materials and commodity supply chains, and relying on low-end manufacturing to support the economy, this will inevitably affect Vietnam's already fragile fiscal revenue and international accounts balance.
According to the warning of the Minister of Planning and Investment of Vietnam, although Vietnam has rich young labor and tax and location advantages, the biggest economic risk facing Vietnam is the slow transformation of the economic system and incomplete laws and regulations. It implements invalid growth policies for a long time, only pursues investment quantity, and does not pay attention to investment efficiency and quality. If Vietnam's manufacturing cannot catch up with Industry 4.0 and information intelligence, then the real gap in manufacturing with other countries will become increasingly larger.
Vietnam has rich labor dividend advantages
This means that according to French Foreign Trade Bank explained in the report published on November 2, "Vietnam cannot become the next world factory because of lack of infrastructure and many factories are staggering. Once there is a problem with the global economy or the macro environment of Vietnam's domestic economy, then Vietnam will exponentially amplify the impact of the external environment. The Vietnamese economy may be at risk of recession for 20 years. The rapid growth era that the Vietnamese economy ushered in after the epidemic may have passed." Vietnam's fairy-tale economic growth stage may have ended, and it is impossible to avoid being harvested by US dollar capital and will have a negative impact on many foreign companies investing in Vietnam. (End)
