Capital Inflows into Vietnam may Face Adverse Impacts, says VEPR

Diep Nguyen

14:30 10/10/2018

BizLIVE -

Capital inflows also face adverse impacts as the Fed continuously raised policy interest rates (set one and two more increases in 2018 and 2019 respectively).

Capital Inflows into Vietnam may Face Adverse Impacts, says VEPR
According to VEPF in the latest report, global economic growth is expected to remain high this year (about 3.9%, IMF). In particular, the US economy continued to grow impressively thanks to increased private spending and fiscal expansion of the government; Japan and EU economies faced slowdown. 
Except for China, BRICS economies continued to grow higher than in previous years. The high growth rate of the US economy will cause the Fed to continue raising interest rates, reducing capital inflows to developing countries, especially those with weak fundamentals or political risks.
China's economy is slowing down in part due to its trade with the United States, but it is less likely to fall into crisis. Room for China's monetary policy is still plenty (low inflation, 2.3% yoy in August; cash reserve ratio remains high, 15.5%; policy interest remains positive, 4.35%; large foreign reserves, over $3,000 billion and so forth) to support China in fight against external shocks.
VEPR highly remarks that it is highly possible that economic growth of developing countries will be negatively affected by the surge in crude oil price, accompanying with currency depreciation as well as trade tension among large economies. 
Under such circumstance, consumption price may soar worldwide, especially in developing countries. Inevitably, interest rates will then be raised to cope with the situation, hence, resulting in a downward trend in the financial markets.
Vietnamese economy will receive multi-dimensional impacts due to developments of the world economy. First, despite of the potential trade confrontation directly with the US, the trade balance of Viet Nam may be indirectly affected via the trade relationship with China. 
That VND is tightly pegged to the USD causes Vietnamese goods to be less competitive. Secondly, capital inflows also face adverse impacts as the Fed continuously raised policy interest rates (set one and two more increases in 2018 and 2019 respectively). Moreover, the Fed’s interest rate hike also exerts pressure on interest rates of the domestic currency to stabilize the exchange rate and prevent inflation.

DIEP NGUYEN