Over-reliance on monetary easing could expose bad debt instability in coming years

December 21, 2023 15:31 Nhat Linh Print article

ANTD.VN - Maybank Investment Bank (MSVN) experts believe that over-reliance on monetary policy easing could expose instability in bad debt and system safety in the next few years.

In its new macroeconomic report, Maybank Investment Bank (MSVN) forecasts headline inflation to increase slightly to +3.5% in 2024 and +3.4% in 2025 (compared to +3.3% in 2023). Inflation is expected to remain below the 4% target.

According to MSVN, prices will be supported by increased consumer demand, but will be controlled by value-added tax (VAT) reductions and other tax and fee reduction measures.

MSVN kỳ vọng Ngân hàng Nhà nước sẽ duy trì lãi suất chính sách hiện tại trong năm 2024

MSVN expects the State Bank to maintain current policy interest rates in 2024

The impact of the recent electricity price hike is expected to be modest, with each 10% increase in electricity prices increasing consumer prices by only 0.33%. Vietnam Electricity (EVN) increased the average retail electricity price by +4.5% on November 9, following a +3% increase on May 4, 2023.

MSVN expects transport inflation (accounting for 9.7% of the CPI basket) to be controlled due to stable oil prices.

However, the contribution of transport to headline inflation is likely to increase in 2024, compared to a largely reduced contribution in 2023. Although transport deflation from February to August 2023 dragged down the CPI, it shifted to an increase from September to November 2023 due to rising oil prices and a declining base.

Food inflation (which accounts for 33.6% of the CPI basket) is expected to be kept under control thanks to favorable supply conditions, even as higher demand supports prices.

Fiscal policy remains supportive, with infrastructure spending robust, with some support measures extended through 2024. Projects underway include some segments of the $6 billion North-South Expressway and the $16 billion Long Thanh airport. The government expects a budget deficit of VND399 trillion ($16.4 billion) in 2024, equivalent to about 3.6% of GDP.

Fiscal space will remain reasonable, with public debt expected to reach around 40% of GDP by end-2024, significantly below the ceiling of 60%.

The 2 percentage point reduction in value added tax (from June 2023) has been extended to June 2024. The 50% reduction in environmental protection tax on fuel will be maintained until the end of 2024. Other tax and fee reductions remain, including export and import tax reductions to support domestic enterprises.

Regarding monetary policy, MSVN expects the State Bank to maintain policy interest rates in 2024.

“Policy rates have been cut by more than 150 basis points in 2023 and may not be reduced further due to the economic recovery. Exchange rate pressure has also limited the SBV from making further interest rate cuts, while the US Federal Reserve (Fed) is raising interest rates. We expect the FED will not lower interest rates until the third quarter of 2024,” the MSVN report stated.

MSVN also believes that the State Bank may not need to raise interest rates, as inflation is expected to remain below the 4% target and authorities remain concerned about the decline in the real estate market.

However, risks include higher-than-expected inflation and a sharp fall in the VND to October-November 2022 levels, which could happen if the Fed turns out to be more hawkish than expected.

MSVN also noted that over-reliance on monetary policy easing could expose instability in bad debt and system safety in the coming years. This suggests that the SBV may return interest rates to normal when the situation is more stable.

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