Fed’s rate cut a double-edged sword for Vietnam: VinaCapital

The U.S. Federal Reserve's (Fed) large rate cut, the first in four years, will bring about mixed impacts to Vietnam, according to leading asset management firm VinaCapital.

The resulting decline in the value of the U.S. dollar reduces depreciation pressure on the Vietnamese dong (VND), but a slower U.S. economy will weigh on Vietnam’s GDP growth, the firm said in a note on Friday.

On the bright side, earlier in 2024, the VND had depreciated by nearly 5%, prompting the State Bank of Vietnam (SBV) to aggressively tighten monetary policy by draining liquidity out of the country’s money market.

Some even expected the SBV to go further and actually hike Vietnam’s policy interest rates by 50 basis points later this year. “All of those developments did help support the value of the VND, but depreciation pressure on exchange rates across ASEAN only really started alleviating from late June when Fed rate cut expectations started increasing,” said the note.

The market now expects the Fed to cut rates by more than 100 bps this year and by another 100 bps next year, which in turn drove a near 4% appreciation in the value of the VND since late June as well as a 7-10% appreciations in the Malaysian ringgit, Thai baht, and Indonesian rupiah. The surge in the value of the Indonesian rupiah enabled that country’s central bank to cut rates by 25 bps this week to 6%.

VinaCapital, however, does not expect the SBV to follow suit, but it sees no possibility that the SBV will hike rates as the depreciation of the VND now stands at less than 1.5% this year, which is much more in line with the SBV’s “comfort zone.”

On the other side, the large rate cut of 50 bps indicates a concerning note about the state of the U.S. economy.

As exports in general and to the U.S. specifically (which were up nearly 30% in the first eight months of this year) have been the most important driver of Vietnam’s GDP growth this year, a slower U.S. economy will likely reduce U.S. consumer demand for “Made in Vietnam” products such as laptops, mobile phones, and other goods.

Consequently, Vietnam’s GDP growth will have to be driven by internal factors in 2025, in order to offset the impact of the slowing U.S. economy, according to the note.

It noted that the Vietnamese government has a number of tools it can use to propel the economy, such as increased infrastructure spending and facilitating the further thawing of the real estate sector.

“Focusing on those two sectors would directly boost the economy, and a more robust real estate market would almost certainly improve consumer sentiment and consumption in Vietnam, which has been somewhat subdued in 2024,” said VinaCapital.

Dragon Capital, also a leading Vietnam-focused fund manager, has recently reckoned that a possible U.S. economic recession “should not be of top concern” for now.

The Fed’s rate cut will offer positive notes for Vietnam, including helping ease the USD/VND exchange rate pressures and paving the way for Vietnam to reduce deposit and lending interest rates. They, in turn, will help accelerate public investment disbursement and credit growth, supporting the government’s GDP growth target.

The Fed’s move will help businesses in Vietnam cut financial costs and expand operations, leading to improved earnings. “This factor will have a good effect on corporate value, boosting the local stock market,” said Dragon Capital researchers.

At a recent talk, Dragon Capital chairman Dominic Scriven assessed that most of the headwinds on the stock market had been over.