Emerging markets
Tools of monetary policy can be classified as interest rate policy, reserve policy, lending operations, asset purchase programs, and intervention in the foreign exchange markets. The central monetary policy objective of the Central Banks in emerging markets is to relax the financial conditions so as to allow credit to reach businesses that are in difficulty, rather than to stimulate aggregate demand. Without timely credit and liquidity, many businesses will not be able to meet their financial commitments, leading to closures or bankruptcy, and hundreds or thousands of workers may lose their jobs. In some countries, Central Banks have implemented asset purchase programs combined with sharp reduction in policy interest rates.
The structure of popular monetary policies in emerging markets include increasing lending activity by 35%, lowering interest rates by 20%, foreign exchange market intervention by 20%, cutting reserve requirement ratio by 15%, and buying government bonds by upto 10%. Many Central Banks in emerging markets implement asset purchase programs, mainly by buying government bonds in local currency, and for the first time helping governments finance huge fiscal support packages. In most cases these are between 0.5% to 1.5% of GDP in emerging markets, compared to 2% to 15% of GDP in advanced economic markets.
The United States is one country that has suffered the most in terms of number of viral infections, the most number of deaths, as well as serious economic losses during the Covid-19 pandemic. This caused the US economy to go into partial recession since February 2020. The US unemployment rate reached 14.7% in April 2020, and by August 2021, it had dropped to 5.2%. The US government has implemented a fiscal policy to stimulate the economy and lend support to those affected by the pandemic. For this, the US Federal Reserve (Fed) has implemented very strong monetary policies such as reducing interest rates, and quantitative easing (QE).
Production recovery
All throughout 2020, ever since the pandemic began to spread, although the world economy was in grave difficulty, such as very low growth and many countries at negative growth, inflation pressure was not so severe, energy prices were still low, the supply chain had not yet been disrupted, but the consequences of any future inflation were not also clear to see. It is the social security and relief policies of countries that ensure relief to people in times of huge losses. By 2021, several countries have begun to reopen on lockdown conditions, mainly due to the fast speed of vaccination of their populations. However, they still faced disruptions in production supply chains, logistics were constantly in turmoil, there were huge labor shortages and rising energy prices, and as a result there was a spike in demand for essential goods.
The imbalance between supply and demand can be seen as the main cause of high inflation now. Currently, there are two viewpoints, that is to say that either inflation is only temporary, or that inflation will be very much long-lasting for years to come. The recent meeting of the Fed at the beginning of November came up with some insightful overviews. The first was that inflation in the US in 2021 will be very high, so it is necessary to reduce the scale of asset purchases, currently at USD 120 bn per month, which will end in March 2022, creating conditions for the Fed to start raising interest rates.
The second is that the fundamentals of inflation in the US are unsustainable, because supply chain disruptions will soon be reconnected, and the wage-price-wage spiral effect will also not last long. The third is that the US inflation forecast of about 2% by the end of 2022 will bring the average inflation trajectory in about four years to target level of 2% per year. These overviews show that the current US inflation is under control, and that many other economies can also control inflation with use of appropriate macroeconomic policies.
Energy prices are forecast to increase in 2022. This will be due to the fact that from the third quarter of 2020, global consumption of crude oil and petroleum products increased higher than output, leading to low reserves. However, the US Energy Information Organization (EIA) in its November report, forecasts that an increase in production from OPEC, the US, and other countries, will lead to an increase in inventories and crude oil prices. Brent oil price is forecast to reach an average of USD 84 per barrel in December 2021, and will fall to USD 66 per barrel by December 2022, or even face a 21% decrease. WTI oil price will reach an average of USD 81 per barrel by December 2021 and will decrease to USD 62 per barrel by December 2022, or go down by 23%.
Recent US polls show that the Fed will raise interest rates in the first half of 2022. The probability is that the Fed will raise interest rates by May 2022 to above 50% and it is expected that by the end of 2022, the base rate will increase by at least 0.75% with a probability of going above 65%.
Monetary policy in Vietnam
Serious world issues such as high inflation, rising energy prices, and the expected US dollar interest rates in 2022, and how they will affect Vietnam, are very important prerequisites to know when considering the potential of the monetary policy in the post-pandemic period for economic recovery. This will determine the size of the stimulus packages and to what extent the economic recovery will be appropriate, feasible, and not destabilize the macro-economy in the future. However, finding the right financial resources and how to mobilize these resources will not be a simple task. In addition, it is necessary to pay attention to warnings about importing inflation into Vietnam, although it is not likely to happen in reality. Moreover, the inflation characteristics in Vietnam show that inflation transmission is not easy to occur.
In order to tackle the current crisis caused by the Covid-19 pandemic, Vietnam needs a financial support package large and flexible enough, to help businesses and people recover physically, mentally, and business wise after the drastic toll taken in last months of lockdown conditions, along with the impending fear and high possibility of more severe new outbreaks to reoccur. Vietnam's economy may fall into a prolonged stagnate state, losing many advantages as well as opportunities to achieve the set development goals without these support packages.
Currently there is still room to operate monetary policy, because the inflation level until the end of October was still low, with CPI below 2% and core inflation below 1%, which is likely to be below 3% by the end of the year. The State Bank of Vietnam can reduce the operating interest rate by at least 1%, and also widen and loosen conditions for discounting and financing of loans. This will bring the average commercial lending rate substantially down.
In particular, a number of targets such as ratio of short-term capital for medium and long-term loans should be maintained from now until at least the end of 2023, in order to reduce pressure to raise deposit interest rates. Regarding credit risk coefficient, while ensuring the minimum Capital Adequacy Ratio (CAR), businesses that suffer losses during the pandemic may have a lower credit risk ratio than the current level, which will help them in accessing credit, while the debt freezing and debt extension mechanism will continue until mid-2023.
In terms of policy, the National Assembly needs to consider setting an average inflation target for next three to five years. It is however not necessary for monetary policy to operate so that annual inflation is below the current target of 4%. Although there are high inflation years and low inflation years, the average inflation in about three to five years needs only to stay below 4%.
In addition, the support fiscal policy must have financial resources by way of stimulus and support packages. Under the trend of increased international interest rates, foreign borrowing is not very appropriate, so the main source of finance becomes domestic debt. Referring to diverse experiences of other countries concerning the fact that the Central Bank directly buys treasury bonds and also conducts Repo operations, it is advisable to consider the State Bank of Vietnam's purchase of government bonds. These bonds provide budget support, and tools to manage monetary policy, such as injecting money by buying government bonds, and by drawing in money by selling government bonds to credit institutions.
In particular, the focus of the fiscal policy is flexibility in policy and effective coordination with monetary policy. As the monetary policy is still spread out large, when the budget revenue is expected to increase for the whole year, it will still be higher than estimate; budget deficit and public debt ceiling will remain within permissible level; and public debt will still be low compared to the safe threshold and ceiling approved by the National Assembly. In addition, the ability to mobilize domestic financial capital is still quite abundant, when government bond interest rate is around 2.09% per year for a ten-year period.
The State Bank of Vietnam uses money supply or deposits from credit institutions, including reserve deposits or payment deposits, to buy government bonds. This is a primary activity, while activities on the secondary market, calls for investors and the State Bank of Vietnam to participate. The recent implementation of repurchase of treasury bonds by the State Treasury due to temporary lapse in the state budget should actually have been conducted by the State Bank of Vietnam.
