Vietnam safe from US rate hike effects: economist

U.S. rate hike of 0.75 percentage points on July 27 would not impact the USD-VND exchange rate -- the U.S. dollar actually fell by nearly 1% afterward -- Michael Kokalari, chief economist at investment fund VinaCapital, told VnExpress International.

The State Bank of Vietnam has been aggressively draining liquidity out of Vietnam's interbank market over the last three weeks, which also indirectly supported the value of the dong, he said.

The latest hike pushed the benchmark overnight borrowing rate to the highest since December 2018 as the U.S. government seeks to deal with 40-year high inflation, which is posing one of the biggest threats to the economy.

But as Fed is signaling that it could pause, or even reverse, its rate hikes by the end of the year, there could be less upward pressure on the USD, and that means the VND is unlikely to fall further, Kokalari said.

"The official value of the VND depreciated by about 2.5% in the year-to-date, and we expect this depreciation to shrink to about 1.5% by the end of the year."

In terms of trade, HSBC Vietnam country head of markets and securities services, Ngo Dang Khoa, expects exporters to gain from a strong greenback, which is now hovering at a two-decade high.

But production costs would increase since most inputs are imported, he said.

However, the bigger risk for Vietnamese exporters is slowing consumer demand in the U.S., whose economy has seen growth decline for two consecutive quarters.

Kokalari said retailers like Walmart and Target recently announced they are sitting on huge inventories of unsold products, many of which are made in China and Vietnam, meaning they would reduce their orders for such products going forward.

Growth in Vietnam's exports to the U.S., its biggest market, slowed down from nearly 40% in the first seven months last year to 24% growth in the same period this year, he added.

In the remaining months of this year inflation could be one of the biggest roadblocks to Vietnam’s post-Covid recovery.

Khoa said inflation is rising fast with a surge in the prices of food, fuel and other goods, and the consumer price index rose 3.14% year-on-year in July.

He expected inflation to exceed 4% between next quarter and the second quarter of next year, which could cause the central bank to increase its policy rates from around 4% now to 6.5% by the end of 2023.

Kokalari said one necessary step to control inflation is to unfreeze the real estate market by addressing the various zoning, legal and regulatory issues that have been plaguing it.

"This will also benefit Vietnam's long-term growth prospects because there is an enormous demand for housing from the country’s emerging middle class."