Monetary easing may continue to foster growth in 2021

05-Jan-2021 Intellasia | VnEconomy | 6:02 AM Print This Post

In 2020, Vietnam had successfully prevented the Covid-19 epidemic while maintaining positive economic growth. However, in 2021, what would be the main force driving the economy to grow?

Chances and motivations in 2021

In the brief report on Vietnam’s macro and market outlook in 2021 just released, SSI Securities Corporation (SSI) forecasted that Vietnam’s gross domestic product (GDP) growth in 2021 would be stable at about 6.5 percent year-on-year. The growth would start to accelerate from Q2/2021 and keep its momentum until 2022, with an increase of more than seven percent. SSI emphasized that attention was being directed to some important events that would take place in 2021, the XIII National Congress of the Communist Party of Vietnam in January, followed by the election of the new National Assembly in May. This was also the first year of the new five-year plan, from 2021 to 2025. In the next five-year plan, the government set an average growth target of 6.5 percent to 7%.

The five-year plan would be divided into two phases, the recovery period from 2021 to 2022 and the acceleration period from 2023 to 2025. Therefore, in 2021, the government would continue to loosen monetary policy and carry out the expansionary fiscal policy. The budget deficit would continue at a high level, even in absolute terms because GDP at current prices was adjusted to increase, said the SSI expert.

SSI also believed that Vietnam’s economic growth in 2021 would be supported by the global economic recovery, especially in the context that Vietnam was becoming a more important centre in the industrial ecosystem. Specifically, in Q4/2020, the index of industrial producer price (IPP) had increased by 6.3 percent over the same period, which increased by 9.5 percent in December alone over the same period. Besides, the manufacturing industry grew significantly at nine percent over the same period. This confirmed that the production had recovered to the level prior to the Covid-19 outbreak.

In addition, although many companies reported that their clients had delayed their plans to invest in Vietnam this year due to travel restrictions, the registered foreign direct investment (FDI) inflows in 2020 would only decrease by 8.7 percent year-on-year. The total registered FDI capital was about $21 billion in absolute value. Thus, this made the prospect in 2021 promising for FDI inflows when public investment growth returned to normal growth.

Free trade agreements, such as Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), EU-Vietnam Free Trade Agreement (EVFTA) or Regional Comprehensive Economic Partnership (RCEP), would have a stronger impact. The recovery of the domestic consumption from 2021 was also considered to be the growth engine for Vietnam’s economy next year.

Would there be further monetary easing?

Notably, in the above report of SSI, the research team highly appreciated the role of the State Bank of Vietnam (SBV) as well as monetary policy in economic growth in 2021. According to the report, it was estimated that nominal GDP in 2020 could reach about 4.24 percent and M2 money supply grew by 15%. While in 2019 GDP increased by 9.4 percent and M2 money supply increased by 14.8%. The growing disparity between nominal GDP growth and the M2 money supply was due to the Covid-19 pandemic and its serious effects on corporate sustainability, the team said.

In the first nine months of 2020, M2 money supply increased by 8.63%. The government estimated that by the end of 2020, foreign exchange reserves reached 100 billion dong, meaning that $22 billion had been purchased by SBV in 2020, like 2019.

On the other hand, the net mobilisation value from the open market operation (OMO) was almost zero for the whole 2020. In general, the net cash injection value from SBV might increase by 13 percent over the same period in 2020.

However, due to weak credit growth in the first 11 months, liquidity became abundant.

In the context of a decline in private investment and consumption, bank deposits had shifted to corporate bonds, as volume of issued in the first nine months increased by 79 percent year-on-year, and possibly the stock market, as price daily transaction value increased by 41 percent in the first 11 months of 2020 compared to the average of 2019, while foreign investors net sold a net of $704 million. In 2021, SBV would continue the easing policy in the context that other central banks also implemented a similar strategy and the US dollar might continue to depreciate, the research team at SSI forecasted.

However, foreign exchange policy in 2021 might change after the US Treasury Department determined that Vietnam was manipulating the currency. This might be the main catalyst for SBV to emphasize ‘not to create an unfair international trade competitive advantage’ in the policy direction.

Therefore, the dong was expected to increase in proportion to the positive changes in macroeconomic factors in 2021. Meanwhile, interest rates might escape the bottom in mid-2021 due to the sharp credit growth and the economic recovery, the SSI report stated.

With the same point of view, Viet Dragon Securities Company (VDSC) also believed that the stance on loosening monetary policy would continue in 2021 to support businesses and households in prolonged difficulties due to the pandemic. At the same time, credit growth would increase by 12 percent to 13 percent along with the improvement of business confidence and economic activities. The possibility of further cutting interest rate policy was low. Besides, the dong would continue to be stable against the US dollar in 2021 due to the expectation that the US dollar would continue to weaken, stated VDSC.


Category: Finance, Vietnam

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