Vietnam’s stock market is expected to recover when the U.S. Federal Reserve relents on its aggressive rate hikes, unlike most other emerging economies with current account deficits and huge U.S. dollar denominated debts, according to leading investment fund VinaCapital.
The Vietnamese stock market has sold off more than 20% to date, driven in part by the 21% correction in the S&P500, VinaCapital noted in a report.
The fund attributed the global stock market's downturn to the Fed’s efforts to rein in inflation, mainly driven by global supply chain issues, which exacerbated the already prevailing economic stresses caused by the Russia-Ukraine conflict and China’s Covid-related lockdown.
Some investors are concerned about the possibility of a “perfect storm” for emerging markets due to rising global interest rates, a nearly 10% year-on-year jump in the U.S. Dollar Index's value, as well as soaring energy and food prices.
However, Vietnam’s economy is more insulated from the current difficulties in the U.S. and Europe than in the past, largely because of policy decisions by the government to balance economic growth and stability, Michael Kokalari, VinaCapital’s chief economist, noted.
Though VN-Index is currently selling off along with global stock markets, the country's economy is in firm condition, owing to booming domestic consumption, which is equivalent to two-thirds of Vietnam's GDP. Consequently, the consensus expects the VN-Index earnings per share (EPS) to grow by nearly 20% this year, according to Bloomberg.
Vietnam's improved resilience puts it in a better position to deal with Fed rate rises than in previous rate hike cycles, as shown by global market turmoil's dampened impact on the U.S dollar/Vietnamese dong exchange rate, according to Kokalari.
Past episodes of global stock market volatility hit Vietnam hard, including the Global Financial Crisis in 2008, the Fed Taper Tantrum in 2013, and China’s 2015 depreciation of the Chinese yuan.
However, Kokalari believed that Vietnam's macroeconomy has several fortifications in place to significantly strengthen the country's resistance to the current escalating global economic storm.
In particular, Vietnam currently has nearly $100 billion in foreign exchange reserves, which is in line with the IMF’s recommended level, and its foreign currency denominated debt is below 40% of GDP, around half of which being "soft" loans payable to supranational lenders on concessionary terms.
Vietnam was ranked as the least vulnerable country to the Fed rate hikes and quantitative tightening this year, due to its modest debt levels, macroeconomic stability, and persistent current account surpluses, The Economist wrote in late 2021.
Moreover, the Vietnamese dong has depreciated by less than 2%, versus a 5% devaluation in the Chinese yuan, with inflation remaining modest, in stark contrast to most developed and emerging economies, VinaCapital noted.
Vietnam's year-on-year inflation rate is currently around 3%, with a 3.5% average forecast this year. VinaCapital expects the country’s consumer price index to peak at around 5.5% year-on-year in the second half of 2022, and then fall back to 4.5% by the end of the year.
It is also anticipated that the State Bank of Vietnam would not need to hike policy interest rates as inflation has been maintained at around 4%, in line with the government’s target. This is in contrast to its ASEAN emerging peers that are all raising interest rates or are expected to do so in the weeks ahead.
Finally, policymakers' strategy over the last decade shifted from tacitly condoning uncontrolled GDP growth to balancing macroeconomic stability and development, enhancing Vietnam's resilience to global economic storms, the fund noted.