However, in a discussion with Sai Gon Investment, Truong Van Phuoc, member of the Economic Consulting Team to the Prime Minister, said that there are many factors which support an economic growth of 6.9-7%.
JOURNALIST: - While the trade war is on-going, there are some signs of a currency war as well. These two factors, happening at the same time, are expected to influence the global economy quite badly. What do you think about this?
Dr. TRUONG VAN PHUOC: - Many international experts have been talking about the currency war recently, especially after China adjusted the value of the CNY, to bring the USD/CNY exchange rate above 7%.
However, I think the adjustment of USD/CNY exchange rate was done to reflect the real situation in that country. China’s inflation was 2.8% and is expected to climb to 3% by the end of this year. Hence, the depreciation of 3.9% was normal as the exchange rate just went along with the inflation.
Currently, many countries across the globe have cut their interest rates but their currency value has not depreciated much. This is also another normal case given the difficulties in the global economy recently. The US-China trade war is expected to last long and continue impacting the global economy. Hence, Vietnam’s economic growth is expected to be slower this year.
In my opinion, the currency trade war will not happen. The adjustment by many state banks for foreign currency and monetary policies are traditional and normal actions.
The difference between trade war and currency war is that the trade war can happen in many aspects, many dimensions of the economy, and the simplest things which seem obvious can change import tax regime. However, the currency war is not easy, as there is no country which is able to set its domestic currency as an exchange for one foreign currency.
- Do you expect a recession in the global economy?
- One of the prominent issues currently is the wobble in the US stock market. FED is expected to cut its interest rate strongly in coming times. The other thing that most experts worry about is the inverted yield curve where the 10-year bond yield has fallen below 2-year bond yield. These two factors may create a worry for a recession in the US economy.
However, consultants of President Trump say that this point of view is very outdated. Previously, the bond yield was impacted by the interest rate expectation, but now it is also influenced by other factors like trade war and economic recession expectation.
Hence, there are two different views about economic recession currently. While one group thinks that the economic recession will happen in one year, meaning happen around June to September 2020, the other group, including the White House, expects there will be no economic recession.
FED will have the next meeting this September, and we will see how FED responds under strong pressure from President Trump. The market expects FED to cut its interest rate several times from now until September 2020. Based on this expectation, the market also forecasts that the stock market will increase and USD value will fall in coming times.
- What economic policies should Vietnam prepare for and what do you think about the future prospect of Vietnam’s economy?
- I think there is no fixed solution for this complicated issue, and Vietnam should remain flexible. Jerome Powell, Chairman of FED, said that there is no theoretical way to respond to a special case like a trade war. This is a thing that we need to consider.
Based on the current situation, the global economic growth is expected to be slower, and the inflation rate is also expected to go down. These two factors will create advantages for Vietnam’s economy.
In regards to the inflation issue, the increase in price level of Vietnam is impacted by two factors, internal and external.
In terms of external factors, the total consumption and the price level has not increased much. US has supplied huge volumes of oil to the global market, hence, the oil price is expected to be flat or even decline from now till the end of this year. When the oil price goes down, it will create favorable conditions for Vietnam’s inflation.
In terms of internal factors, the domestic consumption currently is not too high. The agricultural sector has been impacted by the African swine fever virus and difficult weather conditions like floods and storms which have created a shortage of some agricultural products. However, the general market is not under pressure. We have to adjust the price of public products and services, however, the inflation this year is expected not to increase strongly, around 3.2-3.5%.
- Is Vietnam under pressure to adjust the exchange rate in next couple of months?
- In my opinion, the FED rate cut is not a big issue. The depreciation of CNY is just 3.9% over the last time. However, the difference between China’s inflation and other country’s inflation is 1.5%. It means that China has adjusted its currency only 2% and with this adjusted level we cannot call it a currency manipulation to support exports.
US and China will have next meeting this September. US has called China a currency manipulating country, hence, China cannot keep doing things this way. Furthermore, even if China really wants to depreciate the currency, it is not able to do it as the foreign exchange rate is determined by the market mechanism. China is not able to set how many CNY to exchange with one USD, unless China chooses to follow fixed exchange rate mechanism. Furthermore, if it does the second way, it will lose market trust and investor confidence.
Hence, I think China has not objectively depreciating its currency and Vietnam’s reference rate adjustment of 1.4% since beginning of the year is suitable and reasonable.
A year ago, I forecast the reference rate will depreciate 1.5-2%. This adjustment level is suitable to the inflation rate of Vietnam and other countries.
The FED interest rate cut will make USD decline. The USD index which is used to measure the strength of US is currently standing at 98 points. If FED cuts its rate, the USD index is expected to fall to 95-96 points. This will help reduce the pressure for Vietnam in adjusting its foreign currency policies.
- When we look at VND in a stand-alone relationship with CNY and in the situation of bilateral trade between two countries, how should Vietnam respond to the depreciation of CNY?
- This is an issue that we need to care about. The bilateral trade between Vietnam and China is huge. Previously, USD/CNY exchange rate was 6.5, now it is 7.1, an increase of 3.9-4%. However, VND has depreciated only 1.3% compared to USD. So, the difference in exchange rate adjustment between CNY and VND is 2.6-2.8%, meaning CNY must be depreciated about 2.6-2.8% compared to VND.
These are factors that we need to watch closely. So far, we do not see any significant issue as there has not been much change in trade between Vietnam and China.
- The other hot issue is interest rate. Other countries are cutting interest rates and easing their monetary policies, so why has Vietnam’s interest rate remained unchanged?
- There have been many reasons to explain for the flat in interest rate of Vietnam. Firstly, inflation is still high. The National Assembly expects it to be 4% this year. Normally, the interest rate must be higher than inflation rate by some percentages. Over the last few years, while the inflation rate was 3-4%, the interest rate was 7-8%. Hence, Vietnam’s interest rate has remained unchanged because inflation rate has been unchanged.
Secondly, Vietnam is currently restructuring its banking system, including bank liquidity. Generally, Vietnam’s banking system is good although there have been several banks which have high bad debts and low liquidity. Some banks which increased their interest rate recently have been penalized by the State Bank.
Thirdly, the State Bank has asked banks to adjust the ratio of long term loans on short term deposits. To meet this requirement, banks have to have more long-term capital. Banks not only control the credit growth but also have to increase their long-term deposits.
These are reasons which help explain why Vietnam cannot cut its interest rate. However, interest rate cutting is a justifiable demand as it is the input cost of manufacturing companies as well as the economy. Hence, we should have a target to cut the interest rate. When the economy is stable, inflation is low, so we should have plans to cut the interest rate.
- Thank you very much.