Fed rate cuts to help ease forex pressure, stimulate FDI, FII: researchers

Researchers expect the U.S. Fed’s rate cuts, one announced on Wednesday and more likely to happen in the future, to ease USD/VND forex rate pressure and trigger stronger foreign direct and indirect investment in Vietnam.

The Vietnamese dong’s depreciation against the U.S. dollar has narrowed to 1.6% in the year to September 18 from 4.9% as of late May, factoring the Fed’s potential rate cuts.

With continued weakening of the greenback, the dong is expected to depreciate 1.3-1.7% this year, a research team led by economist Can Van Luc has said in a note after the Fed slashed its benchmark rates by 50 basis points on Wednesday, the first cut since March 2020.

A more stable USD/VND exchange rate will make imports cheaper while leaving an insignificant impact on Vietnam’s exports given its economic structure, the note says.

As foreign-invested enterprises (FIEs) account for more than 70% of Vietnam’s exports, they import an equivalent amount of goods for manufacturing (around 55% of the country’s import value) regardless of changes in the exchange rate. In addition, companies and financial institutions increasingly use hedging tools to mitigate forex risks.

A downtrend in global interest rates will stimulate consumer demand and economic activity, helping bolster global growth. As such, demand for Vietnamese goods from developed markets is poised to increase.

Parallel, foreign direct investment (FDI) inflows into emerging markets, including Vietnam, are likely to rise, the researchers say.

Another benefit from the Fed’s move will be the stabilization of interest rate levels and reduction in forex borrowing costs for businesses in Vietnam. USD-denominated loans make up 6.4% of total credit in Vietnam, according to central bank data.

In addition, costs of forex-dominated loans taken by the government and FIEs will decrease, thus reducing lending risks and stimulating credit and investment demand.

The Vietnamese stock market will also be a beneficiary. As the Fed and other major central banks go for monetary loosening, capital flight from emerging markets to the U.S. and other developed market will wane.

As such, foreign selling momentum is likely to slow down and overseas traders return to buying Vietnamese shares, given their low valuations and a possible market status upgrade by FTSE Russell in 2025.

In the first eight months of this year, foreign traders net sold $2.6 billion worth of Vietnamese shares, partly driven by a large gap between USD- and VND-denominated interest rates. However, they were net buyers to the tune of VND1,527 billion ($62.2 million) for four consecutive days until last Thursday on the Ho Chi Minh Stock Exchange, according to exchange data.

Echoing the researchers, Nguyen The Minh, head of retail research at Yuanta Securities Vietnam, said that the Fed’s first rate cut in four years will lead to a weaker U.S. dollar and a smaller gap between USD- and VND-denominated interest rates.

“This is a critical factor for the Vietnamese stock market to lure foreign money in the medium and long term,” Minh noted.

In addition, the State Bank of Vietnam may keep rates low as it’s doing now or even further loosen its monetary policy, thus boosting economic growth and supporting businesses, he said.