The FED’s historic rate hike signals stronger US dollar
The US Federal Reserve hike in interest rates last week has a profound impact on financial markets around the globe, particularly those in emerging economies such as Vietnam, say the experts.
As the Fed sought to slash interest rates over the past decade, portfolio investors seeking higher returns went in search of yield and looked to stocks and other securities in emerging economies to park their investment cash.
As a result, foreign money lifted stocks and currencies and the flood of capital boosted lending and consumption, ensuring emerging markets grew at a faster clip than peers in the developed western world.
In simple terms, this increase – and those over the next year – will now turn off the faucet and encourage portfolio investors to shift money back from abroad to the US, where their securities can receive higher rates of return on less risky investments.
So far in 2015, the experts say foreign investors have already yanked billions of US dollars from emerging markets and as a result, net capital flows for global emerging markets will be negative in 2015.
This year will be the first year in more than two and one half decades that the net capital flows to emerging markets will have been in the red, the Institute of International Finance (IIF) reported last October.
Deputy Governor Nguyen Thi Hong of the State Bank of Vietnam (SBV) says the Vietnam foreign exchange market is well positioned to weather the adverse impact of the rate hike on cash flows.
Foreign investment in stocks and bonds has not been significant to the national economy in the past, and as such, there is no consequential immediate impact, said Hong during a recent widely reported interview.
However, admittedly the Fed rate dramatically reduces the likelihood that companies operating in Vietnam will be able to attract future capital in the foreign exchange markets.
Deputy Director PhD Nguyen Duc Do of the Academy of Finance’s Institute of Economics and Finance agrees, saying the State Bank has sufficient resources to stabilize the exchange market in the short term.
In addition, Do says the move has not come as a surprise to investors and they have had plenty of time to adjust their securities portfolios, so it is highly unlikely it will manifest in a destabilizing rush to exit the market.
However, the Fed said last week it expects to continue to raise rates at a slow, gradual pace throughout 2016 and experts are near unanimous in their prediction that the higher rates will make the US dollar stronger.
Clearly they say this is problematic for Vietnam’s national economy in terms of profitability of exports and it has far reaching implications on the competition for foreign direct investment, principally in the manufacturing and production industries.
They say a rising US dollar drives down the sales price of exports by companies operating in Vietnam to the US and other markets while simultaneously requiring them to shell out more for imports into Vietnam from other markets.