VinaCapital, a Vietnamese investment management and real estate firm, in a recent report commented that the U.S. Federal Reserve reduction of the Federal Funds Target Rate (FFTR) may appear positive but will have a harsh long-term impact on the Vietnamese economy.

The U.S. Federal Reserve (Fed) has recently announced its decision to cut the FFTR by 50 basis points (bps) to 4.75-5 percent, the first in four years, a move that is considered a ‘double-edged sword’ for Vietnam's economy, according to VinaCapital.

This is also the general trend of regional currencies such as Malaysian ringgit, Thai baht, and Indonesian rupiah.

The Fed also announced its monetary easing policy forecasts to bring the FFTR to around 3-3.5 percent by the end of 2026.

While a weaker U.S. dollar can reduce devaluation pressure, a slowing U.S. economy will negatively affect Vietnam's export growth.

According to assessments from VinaCapital, the Fed's interest rate cut is a factor supporting the current value of the Vietnamese currency.

In early 2024, the dong depreciated nearly five percent, forcing the State Bank of Vietnam (SBV) to tighten its monetary policy.

As of the end of June, the dong had recovered to four percent after the Fed's initial cuts.

VinaCapital commented that although the Fed's interest rate cut reduces pressure for the SBV to increase interest rates, the fact that the U.S. economy shows signs of slowing down may cause difficulties to Vietnam's exports to the U.S. -- the main factor boosting Vietnam's gross domestic product (GDP) this year.

A slower U.S. economy may likely diminish U.S. consumer demand for 'made-in-Vietnam' products such as laptops and mobile phones.

Therefore, Vietnam's GDP in 2025 will need to rely on internal resources to maintain growth through boosting infrastructure spending and real estate market recovery.

“We have repeatedly emphasized the view that the current boost to Vietnam's GDP from export growth will likely taper next year, and the Fed's move confirms that,” VinaCapital stated.

Their analysts further observed that increasing spending on infrastructure and accelerating the recovery of the real estate market are two powerful tools the Vietnamese government can use to avoid negative impacts from a decline in export growth.

Meanwhile, Suan Teck Kin, executive director of global economics & market research at Singapore’s UOB Bank, remarked that the Fed's interest rate cut has signaled uncertainty in the U.S. economy.

However, Suan predicted that the Fed will continue its interest rate-cutting cycle in 2024-25, which could indirectly influence the SBV's monetary policy, putting pressure on it to adopt similar easing measures.

He maintained an expectation of a 100-bp cut in 2025, meaning one 25-bp cut per quarter.

The SBV will maintain the key policy interest rate in 2024 to control inflation, and Vietnam’s GDP expansion is expected to bank on public investment stimulation and real estate market recovery.

Over the first eight months of 2024, the consumer price index (CPI) increased four percent over the same period last year, just slightly below the target of 4.5 percent, Suan noted.

He continued to say that Vietnam may see upward pressures following typhoon Yagi, which has left a trail of destruction since it made landfall in the northern region on September 7, and disruptions to agricultural output, which accounts for 34 percent of the CPI weight.

He asserted that the SBV is likely to adopt a more targeted approach to support impacted individuals and businesses in their regions, instead of implementing a broad, nationwide tool such as interest rate reduction.

Both VinaCapital and UOB experts agreed that even though the Fed’s move brings challenges, it opens up opportunities for Vietnam to step up measures to promote the economy, ensuring stable future growth.

“Consequently, we anticipate the SBV's maintaining its refinancing rate at the current 4.5 percent while focusing on facilitating loan growth and other support measures,” Suan told Vietnam Investment Review.

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