Communist Review - Successful management of the monetary policy in 2022 contributed enormously to maintaining macroeconomic stability, boosting growth, and ensuring social welfare. In 2023, the State Bank of Vietnam continued to implement a flexible monetary policy to adapt to challenges and fluctuations to fulfill its mission.

Difficulties amid strong global turbulence

The year 2022 was an exceptional one, as the global landscape was defined as "uncertain," with the climax of complicated geopolitical developments including the eruption and escalation of the Russia-Ukraine conflict. Just a year after an impressive recovery from the COVID-19 pandemic, the global economy slowed down significantly. Many of the major drivers of the global economy and trade were at risk of crisis. Worldwide inflation hit a 40-year record high. More than 80 countries grappled with two-digit inflation hikes as the prices of raw materials, fuel, and essential goods skyrocketed. To cope with inflation, central banks around the world had to shift from easing to tightening their monetary policy management by rapid and intensive increases in regulatory interest rates. As a result of the strengthening of the USD in the global market, the investment flow reversed out of emerging and developing markets, putting depreciation pressures on many national currencies, thus forcing the central banks of these countries to use foreign exchange reserves to intervene and stabilize the markets. For a highly open economy such as that of Vietnam, the rapidly changing and highly volatile international environment in 2022 posed unprecedented challenges in macroeconomic management in general and monetary policy management in particular.

Vietnam, like many developing Asia-Pacific nations, entered 2022 faced with a delay in economic recovery and development compared to developed countries in the West. In 2021, while developed countries had basically controlled COVID-19 and reopened their economies,  the pandemic continued to plague Vietnam, affecting economic growth and people's lives. In 2022, when the pandemic was contained and economic recovery had begun, Vietnam encountered newly unfavorable global developments.

On one hand, the global economy, including Vietnam's two largest export markets, the United States and the European Union, slowed down due to tighter global financial conditions. On the other hand, the prices of raw materials, fuel, and commodities in the world surged. In particular, domestic petroleum prices increased due to rising oil prices and supply chain disruptions. As fuel is a crucial and irreplaceable element for most production and business activities, these domestic fuel price hikes led to  increases in production costs and ultimately the prices of services and goods, fanning inflationary pressure.

Furthermore, increasing global interest rates and the strengthened USD put pressures on the management of domestic interest and exchange rates. This, coupled with the negative sentiment in the market and among investors due to irregularities in the real estate and corporate bond markets, made macroeconomic management more difficult.

The management of monetary policy in such an uncertain and challenging situation became a complex balancing act between several critically important macroeconomic objectives: controlling inflation, maintaining macroeconomic stability, and supporting economic recovery. Opting for a tighter monetary policy to control inflation, for example, could lead to a lower growth rate. The economy, which was already shaken by the COVID-19 pandemic, could lose steam during the recovery process, which would adversely affect living standards and the financial health of businesses, thereby hindering long-term growth potential.

If the monetary policy was loosened to facilitate a quicker economic recovery, it could result in the risk of high inflation and macroeconomic instability. High inflation acts as an invisible tax, which directly erodes purchasing power and reduces the quality of life, especially for vulnerable groups and laborers who had already suffered from the COVID-19 pandemic. Macroeconomic instability could leave long-lasting consequences on socio-economic development and make the country less attractive to foreign investors. In the 2012-2019 period, macroeconomic stability and controlled inflation provided a solid foundation for rapid and quality economic growth in Vietnam. Choosing the right tools and policy solutions in a world full of uncertainties with interconnected and sometimes conflicting objectives was a tough question for countries, especially ones with an open economy like that of Vietnam.

Flexible management of monetary policy

Accepting trade-offs between two objectives could  lead to unpredictable consequences, but pursuing both objectives simultaneously was almost infeasible. Under such a plan, the market economy could face the risk of policies undermining each other, resulting in the failure of both goals, followed by low growth and high inflation. In this context, the State Bank of Vietnam (SBV) proactively and flexibly managed the monetary policy, using a set of appropriate monetary policy instruments to harmonize macroeconomic objectives. The SBV adhered to the principle of supporting economic recovery while staying on guard against inflation and macroeconomic instability risks.

To achieve a balanced outcome, monetary policy management needed to prioritize specific objectives at specific times in line with market conditions. Flexibility and prudence were crucial given Vietnam’s small economic size, limited resources, and vulnerability to external shocks.

In the first nine months of 2022, despite a rapid increase in global interest rates, the SBV worked to maintain stable regulatory interest rates to support  liquidity, provided credit institutions with low-cost access to capital, stabilized exchange rates, and set reasonable credit growth targets in line with the economic demands and capital absorption capacity. Subsequently, the VND’s depreciation was much lower than the currencies of many countries in the region and the world. Domestic interest rates increased slightly while global interest rates soared rapidly. Businesses and individuals’ demands for credit were met and major macroeconomic balances were secured.

However, unforeseeable negative developments in the market since late September 2022 have forced the SBV to pursue strong policy interventions to ensure the stability of monetary and foreign exchange markets and the safe operation of credit institutions. The forex market faced significant pressure as the US Federal Reserve aggressively raised interest rates.  Exchange rates increased sharply, liquidity decreased, and the demand for foreign currencies grew. Information about the authorities’ handling of misconduct at the Van Thinh Phat Group adversely affected depositors’ confidence, triggering mass withdrawals from many banks and subsequent tensions in liquidity in the banking system. These challenges, coupled with rising inflation pressures, presented unprecedented difficulties for the SBV's monetary policy management. In this context, the central bank focused on the trading of valuable papers via open market operations, maintaining a stable required reserve ratio, and refinancing to meet customers’ rights and interests, thus improving market sentiment and addressing liquidity risks in the system.

The SBV also widened the exchange rate band, allowed the VND to fluctuate more flexibly, remained prepared to sell foreign currencies to intervene in the forex  market, and twice raised the regulatory interest rate, each time by 1%, at the end of September and October. These resolute and timely measures helped control inflation, stabilize the exchange rate, and improve the ability to adapt to market fluctuations at home and abroad, contributing to macroeconomic stability and the system's safety.

In November, as the monetary and forex markets eased and liquidity improved, the SBV raised the credit growth target 1.5-2%. Banks with better liquidity and lower lending rates were given a higher target. At the same time, the SBV requested that banks balance their capital to ensure loan provision, liquidity, safe operations,  and repayment for businesses and individuals. The central bank also readied timely liquidity support measures to reassure credit institutions. 

The SBV’s proactive and flexible management of the monetary policy in line with market developments has contributed to meeting the country's important macroeconomic goals. Economic growth rebounded to more than 8%, the highest in the past 10 years, inflation was kept at 3.2%, and major economic balances were maintained. The SBV's monetary policy management was applauded by many international organizations. Prestigious international credit rating agencies including Moody's and S&P upgraded the national credit rating for Vietnam, reinforcing the confidence of investors, businesses, and the public in the country's economic environment and medium-term prospects.

Monetary policy management in the current context

Despite notable achievements in 2022, economic challenges and difficulties remain, both globally and domestically. 2023 is projected to continue to be challenging for macroeconomic management in general and monetary policy management in particular. Global economic growth is slowing and many central banks are expected to maintain high interest rates throughout 2023 in an attempt to curb inflation. Prices of commodities around the world, especially oil prices, remain unpredictable due to policy changes in the Organization of Petroleum Exporting Countries (OPEC) and the reopening of the Chinese economy. Domestically, the policy choice dilemma re-emerges as economic growth is expected to be affected by weakening global demand, while inflationary pressure has been high since the beginning of the year. To help ensure macroeconomic stability, control inflation, and support economic growth, the SBV will continue proactive monetary policy management in line with global and domestic economic developments, focusing on some of the following key aspects.

First, adhering to the National Assembly's Resolution 68/2022/QH15 dated November 10, 2022 on the socio-economic development plan for 2023, the SBV continues to closely monitor global and domestic economic developments to cautiously manage monetary policy, with flexibility, and consistency, in close coordination with fiscal  and other macroeconomic policies. This approach attempts to keep inflation below 4.5%, ensure macroeconomic stability and major economic balances, stabilize the monetary and forex markets, and guarantee the safety of the banking system. Other measures include securing rational monetary regulation; managing interest rates and exchange rates in line with market and macroeconomic developments, as well as monetary policy objectives; managing reasonable credit growth; focusing capital on production and business activities, particularly in priority sectors; controlling credit in high-risk areas, and improving credit quality.

Second, the SBV will closely monitor domestic inflation and will develop  scenarios for policy management and responses in line with domestic and international market developments. While moderate inflationary pressure at the beginning of 2022 gave the SBV more policy options to support economic growth, inflation constantly surged at the beginning of 2023 and grew close to the target for the whole year. Moreover, delays in the monetary policy implementation could lead to uncontrollable inflationary pressure and inflation expectations and, subsequently, to a more rapid and forceful tightening of the monetary policy than may be necessary. This could result in a "stop-and-go" management method and adversely affect economic activities. Reality showed that the Fed underestimated inflationary pressure and had to continuously raise interest rates in 2022. These rates are expected to remain high throughout 2023 to control inflation, pushing the US economy to the risk of stagnation.

Third, the SBV will enhance coordination between monetary policy and other macroeconomic practices to balance common goals, as relying solely on monetary policy to achieve multiple objectives is infeasible. For example, effective inflation control in 2022 was attributed to the effective coordination of many macroeconomic policies, including a reduction of value-added tax (VAT), and the environmental protection tax on petroleum, as well as the management of prices of essential goods and services controlled by the State, such as electricity, water, healthcare, and education. Effective policy coordination will help ease the pressure on each specific policy, allocate State resources more efficiently, and leverage the strengths of each policy in each specific area.

This article was published in the Communist Review No. 1011 (April 2023)