FED cuts interest rates: A good opportunity for Vietnam’s exports and investments

Dr. Can Van Luc, Chief Economist at BIDV and a member of the National Financial and Monetary Policy Advisory Council

How will the FED's interest rate cut impact the Vietnamese economy, sir?

This move by the FED will have a positive impact on exports and domestic investment. The reduction in interest rates will contribute to a general decline in global interest rates, as many central banks around the world follow suit. This will stimulate consumption, investment, and production among businesses and the public, boosting demand for Vietnamese exports, especially given the high openness of Vietnam’s economy and the significant export markets in the US and Europe.

Regarding investment, the FED's rate cut will narrow the interest rate differential between the USD and VND, thereby easing pressure on the exchange rate. Recently, the exchange rate pressure between the VND and USD has decreased, which not only alleviates inflationary pressures domestically but also enhances confidence among investors and businesses in their investment and trade activities.

Additionally, foreign investment flows, especially indirect investments, will be positively influenced by this narrowing interest rate gap, creating favorable prospects for the stock market. The trend of withdrawing funds from emerging markets back into the US and other developed markets for risk hedging and interest rate differentials will gradually diminish. The Vietnamese stock market is currently attractive, with expectations of being upgraded from emerging to frontier market status by FTSE Russell in 2025, leading to an increase in net purchases by foreign investors since early September 2024.

Do you think Vietnam’s interest rates will also decrease in response to the FED?

Vietnam's operational interest rates have already been reduced since 2023. The current rates are reasonable, with the refinancing rate at 4.5% and the discount rate at 3%, aligning with an inflation target of around 4%. Therefore, there’s no immediate need for further changes.

Moreover, the Government and the State Bank of Vietnam have taken decisive actions to support production amid economic challenges. While deposit interest rates have risen, the Government encourages banks to reduce costs and avoid increasing lending rates, even pushing for reductions to support businesses. Particularly in light of the damage from the typhoon No. 3, the Government has urged banks to lower interest rates to assist affected individuals and enterprises. Thus, I believe the current lending rates in the banking sector are quite favorable, aligning well with the macroeconomic context and inflation, including the endurance of Vietnamese credit institutions.

Could you elaborate on the impact on export and import activities?

Exchange rates significantly influence export and import activities. Currently, exchange rates have stabilized and are not increasing sharply as before, which usually indicates a strengthening of the local currency and a decrease in foreign currency value. However, this doesn't always benefit Vietnam's exports, as the foreign currency’s value abroad remains high, affecting the competitiveness of Vietnamese goods. Furthermore, Vietnam's exports rely heavily on FDI enterprises, so the relationship between exchange rates and foreign trade needs careful consideration.

As I mentioned earlier, when the FED lowers interest rates, it will promote investment and consumption, thereby increasing demand for Vietnamese goods and services and opening up more export opportunities.

Despite this, the economy still faces many risks and challenges. What solutions would you recommend to address these?

Departments, sectors, and localities need to continue implementing the directives on socio-economic development from the Party, National Assembly, and Government. Immediate priorities include addressing the aftermath of the typhoon No. 3 while proactively analyzing and forecasting international economic and financial conditions and developing suitable response scenarios. We must accelerate the resolution of obstacles and barriers in financial and real estate markets.

Additionally, improving the effectiveness of policy coordination—especially between monetary, fiscal, price policies, and other macroeconomic policies—is crucial to promoting growth and controlling inflation. The fiscal policy should continue to play a leading role, focusing on expanding key areas linked to accelerating public investment disbursement, while the monetary policy should be proactive and flexible to increase access to credit while managing risks and addressing bad debts.

The monetary policy should continue to flexibly utilize various tools to stabilize interest rates, the foreign exchange market, and the gold market. The Government should prioritize solutions to upgrade the stock market to leverage opportunities for international investment asset allocation and control risks during the interest rate reduction cycle.

Thank you, sir!