Unlocking FX hedge may be next in reform agenda

Foreign investors who decide to invest in Vietnam, according to ANZ Vietnam’s head of markets Phan Thi Thanh Binh, often have concerns over their currency exposure, and thus wish to manage the exposure through foreign exchange (FX) hedging products.

Many foreign investors, however, must leave their capital investments or dividend stream unhedged due to Vietnam’s FX regulations. The cost of an unhedged FX exposure is part of the financial cost calculation that foreign investors need to consider when investing in Vietnam. According to Binh, to lower the cost and entry barriers, one of the things that Vietnam should consider is to have a roadmap that allow offshore investors to penetrate more in the local forex hedging market.

“As Vietnam’s economy and foreign currency reserves get stronger, Vietnam should consider providing foreign investors with some basis of foreign currency risk management products to help them hedge their capital investments,” she suggested.

While FX risk management products have long been available in developed markets around the world, the hedging market in Vietnam is still underdeveloped due to limited understanding of the risk, lack of hedging corporate governance, and lack of financial planning.

The old FX regime, where FX daily fixing only changed when there was a planned devaluation, was an obstacle for the development of the hedging market. This has now been replaced by the new FX daily fixing method.

Binh sees the new FX daily fixing mechanism, implemented by the State Bank of Vietnam earlier in January, as a major development for Vietnam’s FX hedging market. The new fixing, based on a basket of currencies, is more market-oriented and closer to the international market practice of open economies.

A key advantage of the new FX administration, according to Binh, is to help Vietnam better cope with external financial volatilities. “The recent spike of USD/VND after Trump’s victory more or less reflected how external sentiment and volatility can impact the FX market in Vietnam,” she said.

The new FX administration urges corporates and individuals to look at both internal and external factors when considering their hedging strategies.

“It is indeed harder for corporates and individuals to predict what is in the mind of policy makers [the case under the old FX regime] than predict the market [as it stands under the new FX regime], as we have seen the unpredictability in both Brexit and Trump events,” Binh said.

As the global economy is likely to remain volatile in the remaining months of 2016 and in 2017, ANZ expects to see its clients actively working on FX hedging strategies to manage their currency risks through FX hedging products, as well as their assets and liabilities management strategies.

“At ANZ, we leverage our global expertise and local knowledge to provide a comprehensive FX product suite, including FX spot, FX forward, FX swap, and FX options,” Binh said.