The macroeconomic situation could show a clearer recovery from the fourth quarter of 2023.

Báo Quốc Tế•09/08/2023

Dr. Le Xuan Nghia, Director of the Business Development Research Institute (BID) and member of the National Financial and Monetary Policy Advisory Council, believes that countries will loosen monetary policy more in 2024. However, a sudden acceleration in economic recovery is unlikely, both globally and in Vietnam.

Chuyên gia kinh tế Lê Xuân Nghĩa: Kinh tế vĩ mô có thể phục hồi rõ nét hơn từ quý IV/2023

According to Dr. Le Xuan Nghia, Vietnam's economy will recover in a U-shaped pattern, and a rapid recovery is not possible. (Source: Dau Tu Newspaper)

Fitch Ratings has just downgraded the US credit rating by one notch. In your opinion, what impact will this have on US policy in the second half of this year?

A credit rating downgrade is very rare for the US. It could be argued that a downgrade by Fitch could put pressure on the country to ease monetary policy sooner than expected, even though concerns about inflation remain.

Unless its credit rating is downgraded, the Federal Reserve (Fed) could potentially raise interest rates slightly by 0.25% in September, but given this event, further rate hikes are unlikely. In fact, I believe the Fed might even lower interest rates later this year to stimulate consumer spending during the Christmas and New Year holidays.

So what about other major countries? Are there any variables that could cause their monetary policies to shift?

Currently, the UK and Europe have not loosened monetary policy, but I believe that these countries will gradually reduce the intensity of interest rate increases, slowing down by the end of this year, and possibly aiming for a reduction in interest rates at the beginning of next year.

We're looking at two notable economic indicators: the Purchasing Managers' Index (PMI) and the USD Index.

Currently, the PMI index of countries such as the US, Europe, Japan, South Korea, Singapore, and China is starting to rise. This suggests that global economic growth may have bottomed out and is recovering, with FDI inflows also beginning to rebound. Vietnam is among the countries with the most significant recovery in its PMI index (increasing from 46.2 points in June 2023 to 48.7 points in July 2023).

On the other hand, the USD Index has also fallen sharply from its peak at the end of last year (114 points), dropping to around 102 points at the end of last week, meaning it has returned to normal levels as before the Russia-Ukraine conflict and before Covid-19.

In other words, after 3 years of Covid-19 and more than 1 year of the Russia-Ukraine conflict, many economic indicators such as the USD Index, PMI, and Consumer Price Index (CPI) have gradually returned to normal levels (the US CPI is currently 3%, and Europe's is 5.5%).

The current problem in the global economy is not inflation, but low growth. In this context, I believe that tight monetary policies in many countries will gradually ease, moving towards a more relaxed approach.

Are there any potential risks that could cause countries to further tighten monetary policy later this year, instead of "reversing" to loosen it as expected, sir?

Over the past two years, global inflation has surged due to unprecedented amounts of money injected by countries to support those affected by Covid-19. Even previous economic crises have never seen such a large injection of money. The M2 money supply in the US, Japan, and Europe increased by 20-30% during the Covid-19 period. This was the main reason for the inflation surge. However, this factor no longer exists.

Two variables that could cause inflation in the coming period are food and fuel. Fuel prices remain very difficult to predict. Regarding food, major countries like India and Russia are currently banning rice exports, while others like China are increasing their rice reserves amid recurring natural disasters, potentially leading to higher food prices.

Nevertheless, I believe that global inflation is unlikely to rise sharply in the near future, because consumer demand, although recovering, remains very weak.

Vietnam has shifted towards a loose monetary policy in recent months. In your opinion, is this level of easing sufficient to stimulate the economy?

The extent of monetary easing depends on how much the money supply increases, not how much interest rates are lowered. Currently, there aren't many solutions to increase the money supply. Fortunately, Vietnam has a trade surplus, allowing the State Bank of Vietnam (SBV) to increase foreign exchange reserves to inject money into the market. However, the amount of money the SBV has injected to buy foreign currency so far has been limited, and the open market operations (OMO) are quite weak. Hopefully, in the future, the SBV will increase its foreign currency purchases to inject more money into the market.

I'm talking about the money base – the money outside of commercial banks. As for the money in commercial banks, it's true that it's currently quite abundant, but businesses can't borrow it, preventing it from flowing into the economy. The reason for the low credit growth is twofold: firstly, there are no orders; and secondly, the ability of businesses to pay has significantly declined.

Given the weak cash flow and the current global economic situation, how strong is the domestic economic recovery, sir?

I believe that the Vietnamese economy will recover in a U-shaped pattern, and a rapid recovery is not possible.

Firstly , because the global economy is also recovering slowly, we must be vigilant about inflation (risks from war, fuel prices, food prices).

Secondly , Vietnam's exports and imports decreased in the first six months, but the rate of decline has slowed. Notably, some export sectors such as electronics and agricultural products have shown good recovery. Regarding markets, currently, most export orders to Europe are recovering very slowly due to carbon credit requirements, while Vietnamese businesses are not yet prepared. Thus, exports now rely heavily on major markets such as the US, China, South Korea, and Japan.

Thirdly , the service sector ( tourism , food and beverage, transportation) is also recovering quite well. The most worrying issue currently is that domestic consumer demand remains weak and recovering slowly. However, in my prediction, around the fourth quarter of 2023, the economy will recover more significantly, and the PMI could reach 50 points or higher.

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