The United States Federal Reserve (FED) on December 16 raised its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent for the first time in nearly a decade.
According to Vietnamese and foreign business executives and analysts, Vietnamese businesses will face long-term challenges because of the US rate hike. They expect the Government to adopt reasonable exchange rate policies to mitigate the difficulties faced by businesses.
Viet Nam News and Vietnam News Agency reporters spoke with Vietnamese and foreign CEOs and analysts about it.
Bui Quang Tin, financial expert and lecturer at the business management department, HCM City Banking Academy
The interest rate hike would not have an immediate impact on the global financial markets, including in Viet Nam, because this time the increase is in the prime rate, a reference rate for the US banking system. Any increase in the interest rate on the dollar will depend on many other factors like supply and demand of the dollar in the market and risks.
However, in the long term, the FED's interest rate hike will have the greatest impact on export firms that have dollar loans because the higher interest rate will mean they must pay more for loans.
The return on investment of foreign investors will be affected badly by the FED's interest rate hike.
In addition, the higher interest rate will cause the dollar to appreciate on the global market against other countries' currencies, including the Vietnamese dong.
That will create pressures on Viet Nam's exchange rates and financial policies next year and beyond. But how much impact will depend on many other economic factors in the coming time.
The exchange rate between the dollar and dong will have a great impact on export firms, but Viet Nam should not depreciate the dong at this moment because it has just stabilised its money market after many years of instability in the economy and its exchange rate has remained stable.
According to the General Statistics Office, exports have grown steadily for many years due to the stability in the exchange rate.
Therefore, the nation should preserve this exchange rate stability for several years.
Pat McNeal, president and general director of ONP - Vietnam, LLC
The FED uses the short-term interest rate as a way to curb inflation. If it looks like the US economy is getting stronger, and people are spending at a rate that could increase inflation, the Fed raises the short-term interest rate, slowing things down. If the inflation rate is low and the economy looks like it will stall, the FED reduces the short-term rate, increasing the supply of money, and spurring growth in the economy. After the housing crises and the banking crises in 2009, the Fed was forced to take several actions to protect the economy. One was to reduce the short-term interest rate to zero.
The Vietnamese economy is affected more by the policy decisions made in Viet Nam than what the FED does. The Vietnamese Government has done a fine job of getting inflation under control, and has continued to devalue the dong against the US dollar in a slow, organised manner that continues to make Vietnamese products attractive overseas. I do not think that will change.
If the US economy continues to grow, and the demand for products produced in Viet Nam and shipped to the US also grows, that will certainly be good for those companies, and will also have a positive effect on Viet Nam. Over time there would be an increase in taxable corporate income, increased jobs, increased investments — all good things for Viet Nam. I think it will take more than a quarter percent increase in the short-term interest rate before anyone realises any benefit.
As far as ONP-Vietnam is concerned, in 2009, when the housing market tanked, and the banking crises occurred, we saw orders from our customers decline between 20 per cent and 30 per cent across the board. To this day they have not got back to the pre-crises levels. Now that the economy is gaining strength, our customers are optimistic their sales will grow. If correct, 2016 ought to be a good year for ONP-Vietnam.
I expect the State Bank will continue to follow its plan for controlling the economy, and I would be surprised if they change their policy over a 0.25 percent increase in the US short-term interest rate. Changes in the interest rates cause a lot of speculation, and over time continual increases could begin to affect how people invest their money, but any change is small and slow to come. I think in a couple weeks most people will have forgotten about this increase, and will not remember it until they hear about the next increase. From what the FED is saying, maybe next September.
Le Thanh Trung, deputy general director of HDBank
The Fed's interest rate hike was predicted by the State Bank of Viet Nam. With its flexible monetary policy and exchange rates staying at the maximum allowed level, I think it is just a psychological factor because demand and supply in the market are stable and the supply of foreign currency is always ensured.
Viet Nam is a country with good capital resources. This is proved by the fact that after it signed the TPP, its overseas remittances and foreign currency reserves have remained stable. In addition, Viet Nam is also a country that has a short-term trade surplus and a stable exchange rate between its currency and the US dollar.
In Viet Nam, the banking sector is going through a comprehensive restructuring, thus improving its health. As a result, banks' liquidity is now very high. Moreover, since the State Bank of Viet Nam (SBV)'s anti-dollarisation policies have proved effective, the possibility of forex rate-related fluctuations seems low.
Regulating the foreign exchange rate requires several measures and tools, depending on the situation at home and abroad. It is expected that if the FED increases its interest rate next year the change will be implemented with a road map and not suddenly. This will help keep the dong-dollar exchange rate stable.
As for other factors, when China depreciated its yuan, the SBV had drawn up plans to monitor volatility in the VND/USD exchange rate, but nothing happened.
The central bank has adjusted the interest rate on dollar deposits, making it zero, to increase supply of the greenback in the market and reduce dollarisation of the local economy.
I believe that the central bank's interest rate policies will not change much in the coming time.
Nguyen Xuan Binh – Deputy Head of Bao Viet Securities Corporation's Market Analysis
The foreign exchange rate has put downward pressure on Viet Nam's stock market since the end of 2013, when the US central bank signaled an interest rate hike. However, the pressure was not large at first as foreign investors were hesitant to make investments in Viet Nam due to the country's issues with inflation and interest rates.
But now, the pressure has become clearer. During the past one or two years, foreign investors have withdrawn from the Vietnamese market amid fears that they would earn less profits in local assets, such as stocks, given a weakening Vietnamese dong against the US dollar.
Normally, at the end of each fiscal year, foreign investors, including foreign investment funds, often review their investment portfolios to re-allocate their investments. That move forces them to sell their local assets during November and December to balance their total investments.
But I think the interest rate hike made by the US central will not have a big impact on the value of the Vietnamese dong. Viet Nam's central bank will watch carefully other currencies, not only the dollar, but also a stronger euro and weakened Chinese yuan after the yuan has devalued nearly 3 per cent in the past three weeks after it was added into the IMF's reserve basket.
In my opinion, Viet Nam's central bank will be very careful if it wants to devalue its currency further as they have to observe changes in other currencies and the moves in the markets that Viet Nam has established trade partnerships with. I also think that the central bank may expect the recent changes of the Chinese yuan are only temporary and the yuan will gain stronger on the international market.
Viet Nam's central bank will not devalue the currency in the near future because a weaker dong will reduce investors' confidence in the country's financial health and discourage foreign investors from making investments in the country, especially after Viet Nam has devalued the dong by 5 per cent this year.
If Viet Nam weakens its currency, there will be some positive impact on the stock market, especially for exporters such as textile and garment makers, fishery companies and agricultural businesses, whose products will become cheaper in overseas markets, resulting in higher profits and growth for these companies.
However, a weakened dong will increase input costs for local companies, particularly importers such as plastic producers, steel makers and machinery importers, as they have to spend more dong to buy production inputs from foreign suppliers, which are valued in dollars. A weakened dong will also raise risks for commercial banks as they often make forex investments and will have to spend more money to buy foreign currencies.
Le Thanh Son, Chief Financial Officer, CMC Corporation, a software and internet services firm.
Vietnamese information and technology (IT) companies are dependent a lot on the importation of hardware components and software programmes from overseas IT firms, and those imports occupy a large proportion of total costs for local IT companies. Therefore, the recent foreign exchange rate between the Vietnamese dong and the US dollar, which has hit the ceiling of the trading band set by the central bank, has raised input costs for local firms and led to an increase of our prices, while we have to make higher dong-based payments for the dollar-based contracts.
If the Vietnamese dong weakens against the US dollar, it will benefit CMC Corporation because the company's contracts are dollar-based, which may increase our dong profits for the company and improve the firm's competitiveness in the market. However, a weakened local currency also makes the firm have to spend more to buy software programmes and solutions from other providers, which affects the company's business efficiency.
In the coming time, in order to prevent losses as much as possible that could arise from a weakened dong against the US dollar, CMC Corporation will minimise its dollar-based loans for the importation of production inputs, including hardware components and software programmes. The company will also take into account a forex rate fluctuation of 2 per cent to 3 per cent to ensure minimum impact from the foreign exchange rates on its business projects. And the company will enhance the export of software programmes and solutions to overseas markets in order to earn more income in foreign currency, especially the US dollar. — VNS