HCMC – Standard Chartered Bank has forecast Vietnam’s inflation at 4.2% this year, above the target of below 4% approved by the National Assembly.
Vietnam’s 2023 inflation is predicted to rise to 5.5%, according to the bank’s global research report “Global Focus – Economic Outlook Q3-2022: Near the tipping point” published on July 12.
Inflation remains under control for now but soaring fuel, food and material prices will be factored into consumer prices in the coming months. The fuel component of inflation has been increasing while other components have been relatively low. Price pressures will inch up later in 2022 and in 2023.
This could pose a risk to the nascent recovery in domestic consumption. Elevated inflation could also result in search-for-yield behavior or increase financial instability risks.
Standard Chartered Bank expects the State Bank of Vietnam (SBV) to keep interest rates on hold at 4% in 2022.
“The SBV is likely to stay vigilant against inflation and financial instability, particularly amid ongoing geopolitical risks, although we expect it to stay accommodative this year to support businesses,” said Tim Leelahaphan, Economist for Thailand and Vietnam at Standard Chartered Bank.
Standard Chartered sees a risk that the SBV may raise interest rates earlier than it is expected, given rising inflation and a weaker-than-expected Vietnam dong currency, especially if the U.S. Federal Reserve (Fed) maintains a relatively hawkish stance, added Leelahaphan.
Standard Chartered raises its the U.S. dollar-Vietnam dong exchange rate forecasts to account for pressure on the goods trade balance from elevated commodity prices, with the currency exchange rate between the U.S. dollar and the dong projected at VND23,000 at the end of the third quarter of 2022 and VND22,800 at the end of the fourth quarter of the year.
Standard Chartered expects a sharp appreciation of the dong next year, along with a likely rebound in Vietnam’s current account surplus.
“Vietnam’s economic recovery has shown signs of broadening, while macroeconomic indicators continued to recover in June. The recovery may accelerate markedly in the second half of the year, particularly as tourism reopens after a two-year closure. However, rising global oil prices may have negative consequences for the economy,” said Leelahaphan.
The marcro-economic study also points out three factors could adversely affect Vietnam’s economic outlook, namely new Covid variants, the lifting of U.S. tariffs on imports from China and a global recession.
Pandemic concerns persist, despite Vietnam’s shift to living with Covid. On the trade front, the White House has said it is reviewing tariffs on some U.S. imports from China to ease inflation. This could slow the pace of investment relocation from China to Vietnam, reducing FDI inflows to Vietnam or even resulting in outflows.
Meanwhile, a global recession could hit local exporters hard, with exports of goods and services equivalent to more than 100% of Vietnam’s GDP.