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HSBC: little volatility from any Fed move

Released at: 22:14, 17/09/2015

HSBC: little volatility from any Fed move

Mr. Pham Hong Hai, CEO of HSBC Vietnam, shared his thoughts on the possibility of the US Federal Reserve raising interest rates.

by Quynh Nguyen-Minh Duc

■ Why are the eyes of the world fixed on the meeting of the US Federal Reserve on September 16 and 17?

The Fed is likely to raise interest rates this year, with the question being whether this would be in October or December.

The US is still the largest economy in the world and the US dollar is still the currency most used in financial activities and trade. The Fed has maintained the base rate at zero for eight years.

Maintaining the lowest base interest rate in history helped the world's financial markets avoid disruption in the 2007-2008 period and recover in subsequent years. The global economy has begun to exhibit signs of recovery in certain markets, such as the US and Europe.

However, the consequences of maintaining low interest rates include encouraging more borrowing from developing countries. Therefore, if the Fed raises interest rates, interest costs will rise and money may be withdrawn from emerging markets and flow back to the US to take advantage of higher deposit rates. Currencies in developing markets would then face devaluation pressure.

That is why world markets are holding their breath and watching which way the Fed moves.

In my opinion the Fed will increase interest rates this year, either this week or in December.

Indeed, if the Fed raises interest rates this week it may be seen as a good sign, eliminating uncertainty in the market.

The most important thing is the message the Fed sends when deciding to increase rates in October or December. I think December is more likely, so I don’t expect too much volatility after this happens.

■ If the Fed raises interest rates, what are the implications for Vietnam?

Borrowing costs on US dollar loans will increase and pressure on the exchange rate will also rise. The VND interest rate would have to be adjusted to maintain the attractiveness of the domestic currency, but this is difficult because Vietnam still needs to maintain interest rates at low levels to spur economic growth.

Portfolio investment capital coming into Vietnam is quite low, so the impact of any withdrawal of capital out of the country would be negligible and put little pressure on the VND/USD exchange rate.

■ What movements do you predict in the domestic market?

I don’t think there will be too much volatility because the possibility of the Fed increasing interest rates has been mooted previously and the State Bank of Vietnam (SBV) has anticipated the situation in terms of monetary policy.

Foreign exchange reserves are in relatively good shape and the SBV has committed to keep exchange rates stable until the end of the year.

However, if the Fed increases interest rates higher than the 0.25 per cent forecast, the impact on world financial markets and Vietnam would be substantial and Vietnam would therefore need to be flexible.

■ What is your advice to businesses and individuals?

In my opinion, the SBV has made the right decision in not encouraging businesses to borrow in foreign currencies, especially those who don’t earn revenue from exports. This has eased the pressure on the foreign exchange market.

Given the domestic foreign exchange market has seen temporary fluctuations, businesses and individuals should be cautious when selling or trading. Vietnam’s macro-economic situation at the moment is very different from previous years and also very different from other countries in the region.

Vietnam now has balance of payments surplus, exports are recording strong growth, and foreign investors still view Vietnam as an attractive destination compared to other countries. The supply of foreign currency in the market will therefore be able to meet the demand of businesses and individuals.

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