How will FED’s rate hike affect Vietnam?

In order to combat inflation, the FED decided to raise rates by half a percentage point to 0.75 percent to 1% at its most recent meeting. In addition to raising rates, the central bank announced that it will begin decreasing asset holdings on its $9 trillion balance sheet.

Indirect impacts

In the best-case scenario, the US stock market has weathered the previous four rate hike cycles, gaining an average of 12% in the first year the Fed raised rates, and the current cycle is likely to be no different. It can be explained by the United States' robust GDP growth following the Fed's rate hikes. As a result, the positive effects of higher interest rates can be mitigated by listed firms' strong earnings growth.

Since the US has been struggling with the widespread Omicron mutation and multidecade high gasoline prices, Mr. Tran Duc Anh, Head of Macro & Strategy at KB Securities, said there would be growing concerns that the Fed's aggressive rate hikes to tame inflation may drag the economy into a recession in the conservative scenario. The S&P 500 tends to correct once the US 10-year government bond yield line crosses a long-term downtrend line, owing to concerns about economic growth (such as in 2000, 2008, 2018).

The US stock market likewise witnessed a 10% correction from its short-term top in mid-Q2 of this year, when the 10-year treasury yield hit 1.9 percent. Because the Fed has signaled that future rate hikes will be more aggressive, the 10-year bond yield line is continuing to rise. Mr. Tran Duc Anh believes that once interest rates approach 2.8-3 percent, the market may experience significant adjustments.

For the time being, Mr. Tran Duc Anh inclines towards the optimistic scenario given the recovery of the US economy. Data from the US Bureau of Labor Statistics showed that the total nonfarm payroll employment in February 2022 increased by 678,000, higher than forecast. The unemployment rate dropping to the bottom of 3.8% since the outbreak of COVID-19 combined with a salary increase of 5.8% YoY reflected the optimism of enterprises in the business prospects. The IHS Markit survey showed that increased orders and solved supply chain problems helped the US Purchasing Managers' Index (PMI) rise to 57.3 in February. Bloomberg Economic Insight forecast the US’s GDP growth rate in 1Q21 at 3.4% YoY.

Direct impacts

In the past, the Fed's tightening of monetary policy has often resulted in the USD strengthening and emerging market currencies depreciating, leading to capital flight and increased external debt service obligations. However, due to sufficient USD supply from FDI and remittances, Vietnam can endure the stronger USD. Meanwhile, the March trade surplus is expected to be USD 809 million. Furthermore, domestic foreign exchange reserves remain high. Despite the USD's gain since mid-2021, the USD/VND exchange rate has remained constant and under the authority of the State Bank of Vietnam.

The strengthening dollar reflected expectations of a more hawkish Federal Reserve and a less turbulent market. Furthermore, through the end of 2022, Vietnam's macroeconomic stability would reduce the possibility of a rapid increase in the USD/VND exchange rate of more than 2%. As a result, the impact on macroeconomic conditions and capital flows into the stock market is limit ed.

After weighing the direct and indirect effects, Mr. Tran Duc Anh concluded that the Fed's rate hikes will have little impact on Vietnam's stock market until the US economy collapses and global stock markets stumble. Following the Fed's rate hikes, the VN-Index gained statistically. To be more explicit, from 2003 to 2006, the index climbed by 218 percent, and from 2014 to 2018, it increased by 57 percent.