VietNamNet Bridge - Vietnamese businesses are holding their breath waiting for the US FED’s decision to raise the prime interest rate increase, slated for September.

 

“FED is likely to raise the prime interest rate in September if the inflation rate stays at a low level and the unemployment rate falls to around 5 percent. If this happens, the global financial markets, including Vietnam, will be affected,” said Dr. Nguyen Tri Hieu, a renowned banking expert.

The VN Index dropped by 24.2 points on August 12-14, right after the State Bank widened the forex trading band by one percent. 

The index decreased by another 11.13 points on August 20 following the State Bank’s move on widening the forex trading band again and an official exchange rate adjustment.

In principle, when currencies lose their value against the dollar, the global stock markets would plunge as investors bargain away shares and try to keep dollars as a measure to preserve their capital.

The same thing would happen if the US FED raises the prime interest rate. The move, plus the yuan devaluation and the $22.3 billion worth of the Vietnam-China trade gap, all will put pressure on the dong/dollar exchange rate.

Hoang Cong Tuan, an analyst from MB Securities, said if FED raises the interest rate as expected, the pressure on the dong will be harder. 

However, he does not think the State Bank would make adjustments to the exchange rate because it will have to implement both the tasks of boosting exports and stabilizing the macroeconomy.

Tuan said though Vietnam’s trade gap had increased, the payment balance was still in surplus, which allows the State Bank to make an intervention into the forex market when necessary.

Dr Tran Ngoc Tho from the HCM City Economics University noted that there are many instruments for the government to use to support the export, including preferential loans and tax incentives. However, the policies would create unfairness among different economic sectors and therefore, would distort economic activities. 

Therefore, the best solution for businesses is to upgrade their product quality and marketing activities.

Tho said it was difficult to say if the current dong/dollar exchange rate is reasonable under the current management mechanism, unless the State Bank floats the exchange rate to ‘measure’ the market supply and demand. 

However, considering the theory of an exchange rate in accordance with the purchase power parity, several domestic and international studies show that the dong is overvalued.

Meanwhile, Bui Quoc Dung, director of the State Bank of Vietnam’s Monetary Policy Department, said that the FED’s move to raise the interest rate was considered by the central bank before it made the adjustments in recent days. 

Therefore, Vietnam is ready to respond to movements in the international finance market.

NLD