Economic Context Before the FED's Rate Hike Decision
Post-COVID-19 quantitative easing policies, combined with the negative impacts of geopolitical conflicts, have driven inflation in the U.S. and European countries to record highs over the past 40 years. In the U.S., inflation hit a record 9.1% in June 2022. To curb inflation, the U.S. Federal Reserve (FED) decided to raise interest rates 10 consecutive times, from 0.25% in May 2022 to 5.5% in July 2023.
Contrary to the global trend, Vietnam's economy showed promising signs with a rapid recovery post-pandemic. Reasonable fiscal policies, increased foreign direct investment, and minimal impact from the global energy and food crisis contributed to strong GDP growth in Q1 2022. However, concerns arose that the FED's rate hikes might hinder Vietnam's growth recovery efforts. While not overly severe, these rate hikes did have negative impacts on Vietnam's economy.
FED's Impact on the Vietnamese Economy
Given the U.S.'s influence on the global economy, changes in the FED's monetary policies always have external impacts on other countries.
According to Iacoviello & Navarro (2022), developing and emerging markets are significantly affected by U.S. interest rate changes. These economies have high trade and financial openness, rely heavily on international trade, and have easily movable capital flows, yet their financial systems are underdeveloped and investment risks are high. Consequently, changes in exchange rates heavily impact domestic inflation. Thus, when U.S. interest rates rise and the U.S. dollar appreciates against local currencies, foreign capital inflows decrease, foreign debt value increases, and imports become more challenging. Additionally, high interest rates aimed at combating inflation, combined with a less favorable economic outlook, reduce overall demand, directly affecting export-dependent countries.
As a frontier market with prospects of becoming an emerging economy, Vietnam is not immune to the FED's rate hike trajectory. Vietnam is sensitive to international fluctuations, given its high openness with total import-export turnover nearly double its GDP, with the U.S. being a key market. The USD/VND exchange rate increased sharply to reach a peak of nearly 24,900 VND following the FED's consecutive rate hikes and opposite policies of the State Bank of Vietnam (SBV), and currently at 24,400 VND by the end of 2023, negatively affecting Vietnam's foreign exchange market. The higher USD value has caused import difficulties, while exports have also suffered due to Vietnam's reliance on imported raw materials. This has led to a significant transmission of exchange rates into inflation, raising the consumer price index in 2023 to 4.5% (from 3.15% in 2022). Trade growth slowed due to tight fiscal policies in the U.S. and Europe, while the unresolved food, energy crisis, and inflation had immediate impacts on Vietnam's economy. Total import-export turnover dropped from USD 732.5 billion in 2022 to USD 680 billion in 2023, primarily slowing economic growth from 8% to 5%.
However, despite the global recession, Vietnam's economy was not heavily affected by the FED's policy and remained a rare bright spot, evident by a 5% GDP growth. The continuous USD appreciation did not significantly affect capital inflows into Vietnam. According to Associate Professor Dr. Dao Hoang Tan, capital outflows from Vietnam during this period were minimal, as indirect investment through the stock market was limited. Conversely, foreign capital primarily came from signed trade agreements. Total FDI into Vietnam remained stable, reaching USD 28.85 billion by November 2023, up 14% year-on-year. Unlike many developing countries, Vietnam did not face significant pressure from foreign debt, with public debt at 35.7% of GDP (2022), of which USD debt accounted for only 15%, implying the Vietnamese government still has room for fiscal policies to stimulate the domestic economy.
Stock Market Fluctuations in Vietnam Post FED Decisions
The stock market is highly sensitive and tends to move ahead of macroeconomic indicators. The VN-Index peaked at 1,500.57 points in early 2022, plummeting after the FED's rate hike roadmap announcement, hitting a bottom of 900 points in November 2022. The stock market downturn was due to investor pessimism about the bleak global economic outlook and concerns about external impacts on the domestic market, signaling a subdued 2023 for Vietnam's economy.
Amid the overall gloomy market, some companies maintained strong growth. Investors in emerging markets tended to shift their portfolios to "quality" stocks with large capitalizations and export companies not reliant on imported raw materials. In Vietnam stock market in 2022, large-cap stocks held their value well, and sectors with export potential like oil and gas, industrial goods, ports, and seafood performed well.
After a quiet first half of 2023, the stock market showed signs of recovery in September, with the VN-Index recording a 24% increase from the beginning of the year, surpassing 1,255 points. The drivers were loosened monetary policies, government measures to ease difficulties, and continuous FDI inflows. However, after the USD surged again, the government withdrew funds to stabilize the exchange rate over the next two months, affecting investor sentiment and causing the VN-Index to drop by 200 points. By the end of the year, as the government stopped withdrawing funds and bank liquidity stabilized, the VN-Index began to recover. Positive signs in the stock market in 2023 indicate economic recovery in 2024. Positive growth stocks continued to be in export sectors including steel, oil and gas, technology, along with the recovery of stocks, logistics, and construction.
2024 Outlook
Following aggressive FED policies, U.S. inflation dropped significantly to 3.2% (2023) but remained above the 2% target. Thus, the FED will likely maintain high interest rates, forecasted to slightly decrease to 4.6% by the end of 2024, continuing to pressure the USD/VND exchange rate. However, a large trade surplus, as in 2023, will mitigate some exchange rate pressure. The SBV has not signaled a rate hike, reflecting the government's optimism in the economy's resilience against FED pressures and exchange rate stability in the coming year.
Despite the expected complex global situation, global inflation has been somewhat controlled, and central banks worldwide are anticipated to soon implement reverse policies to stimulate the economy. Domestically, with the existing foundation from 2023, stabilized macroeconomic indicators, and promising businesses, Vietnam's economy is expected to grow 6% - 7% in 2024.
Optimistic projections for the stock market in 2024 suggest that it could reach 1,400-1,450 points, a significant leap from the modest results of 2023.
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(*) Disclaimer: This report aims to provide information for investors' reference only. The views, forecasts, and estimates in this report reflect the author's opinions at the time of publication and are subject to change without notice. Investors should independently assess the information in this report.
