The U.S. Department of Labor reported on November 10 that the October CPI rose by 7.7%, significantly lower than the expected 7.9% (previously 8.2%), marking the lowest level since January of this year. Together with the core CPI, it has retreated from a 40-year high, indicating that inflation has truly peaked. However, the data shows that core service inflation is currently at its highest level since 1982, with an increase surpassing that of goods CPI. Prior to this, the U.S. had experienced seven consecutive months with CPI exceeding 8%.
Nevertheless, analysis indicates that although U.S. inflation has retreated from a 40-year high, it is still more than three times the target set by the Federal Reserve. Therefore, this inflation report, which has delighted the market, will not alter the Federal Reserve's predetermined path of interest rate hikes. For instance, Federal Reserve Governor巴尔金 stated earlier that the U.S. is in the "late stage" of inflation, which is declining, and we will continue to tighten monetary policy to combat inflation. This could lead to a recession, but it is a risk the Federal Reserve must take.
Following the Federal Reserve's announcement on November 2 of a fourth consecutive interest rate hike of 75 basis points and an upward revision of the policy peak interest rate expectation, the CME FedWatch Tool showed on November 10 that the probability of a 50 basis point rate hike to the 4.25%-4.50% range in December is 56.8%, and the probability of a 75 basis point hike is 43.2%. The probability of a cumulative 100 basis point rate hike by February next year is 49.8%,预示着 that the cost of U.S. dollar financing will continue to rise.
In response, the State Bank of Vietnam has implemented two emergency interest rate hikes totaling 200 basis points in the past month, which is the largest amplitude increase in two years to support its currency, the Vietnamese dong, rising inflation, and increasing financial risks. This is a very rare monetary tightening policy that has surprised the market. It is important to note that since the end of 2020, the State Bank of Vietnam has kept key interest rates unchanged, which alone shows the immense pressure the Vietnamese economy and financial markets are facing from the dual risks of being harvested by the U.S.
The Governor of the State Bank of Vietnam later stated that controlling inflation while promoting economic growth is a challenge for Vietnam. DBS Bank's Vietnam interest rate expert predicts that Vietnam's interest rates may reach 6.5% in the first quarter of 2023. Data shows that Vietnam's October CPI will be very close to the country's 4% warning level.
In the vast changes of the world economy, the top predators gain the wealth of other nations, and the U.S. dollar is such a "modern financial pirate." From now on, what may await the Vietnamese economy and financial markets could be towering waves.
Despite Vietnam's impressive economic growth and export data in the first two quarters of 2022, mainly due to improved labor markets leading to retail sales and the return of the tourism industry, the current low global economic development and tightening monetary environment will bring greater inflation and demand pressures to Vietnam.
For example, the increased possibility of a U.S. economic recession may reduce demand for Vietnamese goods. Currently, high inflation in European and American countries has begun to affect Vietnam's domestic production activities and is driving inflation to soar, which poses a significant challenge to the Vietnamese economy and financial markets. Additionally, there is the need to address the risk of non-performing loans. In this regard, the Governor of the State Bank of Vietnam stated that controlling inflation while promoting economic growth is a challenge for Vietnam.
According to Refinitiv Eikon data, as of November 9, the exchange rate of the Vietnamese dong against the U.S. dollar hit a record low of 23,750 since records began in 1993. In particular, Vietnam's external debt expansion has been faster and has been listed by international institutions as one of the countries in Southeast Asia that most need to consolidate their finances.
In fact, the financial team has noticed that in recent years, Vietnam seems to have suddenly turned into an economic black hole, mobilizing the entire nation to start the "world factory" and "Industry 4.0" plans, sparing no effort to absorb resources such as capital, debt, technology, manufacturing enterprises, and even talent from the United States.Financial experts from DBS Bank have indicated that Vietnam is currently facing the urgent need to raise interest rates, coupled with a global risk-aversion sentiment, which is expected to pose multiple threats to the Vietnamese financial market. This downward risk is likely to persist into 2023 and will impact various aspects of Vietnam's economy.
Especially with the Federal Reserve in the United States dealing with a confluence of economic pressures such as high inflation, soaring debt costs, and high domestic manufacturing costs, the U.S. may initiate a process to offload its debt and inflation risks by targeting the Vietnamese economy and financial debt market black hole.
Analysis reveals that the core vulnerability of Vietnam's finance lies in its entrapment in the dollar debt trap black hole, attempting to exchange interests with Wall Street groups. However, Vietnam's foreign reserves are burdened with external debt amounting to nearly 50% of its GDP. As of October 6th, the total debt of banks has increased by 10.49% compared to the end of 2021, with credit growth expected to reach 14.8%.
This indicates that Vietnam's past high economic growth and economic miracles have been fueled by the accumulation of risky loans and external debt, all of which are piled up with massive dollar debts. As the U.S. begins to harvest Vietnam, this will exacerbate market volatility and squeeze out international investments.
Research institution FocusEconomics has stated that Vietnam essentially experiences an economic crisis every 10 years, which becomes more evident in the context of the Vietnamese central bank's need to respond to the Federal Reserve's aggressive interest rate hikes by unexpectedly raising rates twice in succession by a total of 200 basis points. This is because Vietnam does not have a broad foreign reserve moat, only enough to support three months of import demand for the Vietnamese economy.
Data shows that as of October, Vietnam's foreign exchange reserves have dropped to $95 billion. Against the backdrop of the Federal Reserve's aggressive interest rate hikes, its foreign reserves will soon be depleted in defense of exchange rate stability, and this situation will not change in the short term.
This indicates that Vietnam's debt servicing costs are beginning to multiply, and the risk of default is soaring, making it highly likely that U.S. capital will harvest wealth from Vietnam, posing risks to Vietnam's stock, bond, and foreign exchange markets. This will become more apparent against the backdrop of Europe's economic and financial market crises, as most of the profits from Vietnam's manufacturing industry are controlled by European and American manufacturers.
According to a report by Vietnam Express on November 10th, due to strong selling pressure in the Vietnamese stock market, the decline since September has approached 25%. On November 10th alone, the market plummeted by more than 5%.
This has also led to the quiet withdrawal of perceptive international investments from Vietnam. Within seven months up to November 9th, foreign investors had already net sold a staggering 136.8 trillion Vietnamese dong worth of financial securities assets, retreating from the Vietnamese market and not returning, nearly six times that of the same period in 2021. This has led to a continuous decline in the Vietnamese stock market, coupled with a global risk-aversion sentiment, posing a threat to high-value assets represented by the Vietnamese stock market and easily leading to a domino effect.
Considering that Vietnam's limited foreign reserves are no longer able to cope with the sudden rise in dollar borrowing costs, it is highly likely to become a "sacrificial lamb" to be harvested by the Federal Reserve's aggressive interest rate hikes and a potential U.S. economic recession. This also indicates that Vietnam's economy cannot avoid being harvested by dollar capital.Although Vietnam has been actively implementing multifaceted reforms and achieving some impressive economic data, and possesses a demographic dividend with a rich young labor force, its economy remains primarily focused on low-end manufacturing. A significant characteristic at present is the high external dollar debt, an economy dominated by agriculture, severe dependence on foreign capital, and an economy supported by low-end manufacturing with limited added value. Agriculture accounts for 30% of Vietnam's Gross Domestic Product (GDP), and the agricultural population constitutes 80% of the total population. The majority of workers are engaged in professions related to the ocean.
Simultaneously, the transformation of Vietnam's economic system has been slow. Amidst the current context of skyrocketing land prices, rising prices, and high dependence on foreign markets for raw materials, the country's labor costs are increasing annually by almost 10% to 20%, already double that of Laos and Myanmar. The investment in establishing factories requires many years to recoup costs, further compressing corporate profit expectations.
Analysis suggests that with increased economic uncertainty risks and in the era of information intelligence, the sustainability of Vietnam's economic model is not strong. This will have a negative impact on many foreign enterprises investing in Vietnam. Gerry Mattios, Vice President of Bain & Company, stated that Vietnam cannot become the next world factory due to a lack of infrastructure and the fact that many factories are struggling.
We have observed that although the Vietnamese authorities approved a document aimed at attracting high-tech and high-added-value investment projects as early as June to change its low-added-value manufacturing industry in the "2021-2030 Foreign Investment Cooperation Strategy," the results have not been satisfactory. According to a report published by the Vietnamese Foreign Investment Agency on October 30, Vietnamese enterprises invested only about $489 million in total in foreign enterprises in the first nine months of this year, a year-on-year decrease of 30.1%.
Ngo Tri Long, former director of the Price Market Research Institute of the Vietnamese Ministry of Finance, stated that the biggest risk facing Vietnam's economy is ineffective growth policies that pursue investment quantity without focusing on investment efficiency and quality. If the United States, a major export market for Vietnam, falls into recession in 2023, it could exacerbate the risk of recession in Vietnam.
The International Monetary Fund (IMF) estimates that other direct risks Vietnam faces include global financial conditions, supply chain shortages, and the development of the real estate and corporate debt markets. Data shows that Vietnam's economy grew by 2.6% in 2021, far below the 7% growth trend before 2020. Therefore, high oil prices, supply chain shortages, and the tightening of Federal Reserve policy, among other internal and external factors, could significantly impact Vietnam's economic recovery pace and inflation, negatively affecting many Vietnamese enterprises and increasing the macroeconomic risks for Vietnam's economy.
According to the warning from Vietnam's Minister of Planning and Investment, although Vietnam has advantages in labor costs, taxes, and geographical location, if "Made in Vietnam" cannot keep up with Industry 4.0, the real gap with other countries in manufacturing will widen. This also indicates that Vietnam cannot avoid being harvested by dollar capital. With rising inflation and the continuous spread of downward risks in the financial environment, there is a risk that Vietnam's economy could regress by 20 years.