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Vietnam should raise rates, manage dong: Moody’s
Vietnam should raise interest rates to above the inflation rate and manage the dong “carefully“ to avoid an “overshoot“ in the currency’s depreciation, said Moody’s Economy.Com, a subsidiary of rating’s agency Moody’s.
Morgan Stanley and Deutsche Bank AG have forecast the dong will be devalued, with forwards contracts pricing in a 29 percent drop next year, as consumer prices soar and the trade deficit has tripled so far the year.
Moody’s Investors Service, Fitch Ratings and Standard & Poor’s have all lowered their outlook on Vietnam’s credit rating since the start of May.
“Vietnam can still avoid a currency crisis if the government restores macroeconomic credibility by acting quickly and decisively,’’ wrote economists Sherman Chan and Tu Packard in a research note last week.
The dong gained 0.04 percent to 16,614 per dollar on Monday, according to data compiled by Bloomberg.
The State Bank of Vietnam lifted the benchmark rate to 14 percent last week, the highest in Asia, from 12 percent to battle inflation that is running at more than 25 percent.
The central bank also set a 2 percent weaker reference rate on June 11 to curb currency speculation.
Dominic Scriven, a director at Dragon Capital, a Ho Chi Minh City-based investment firm with more than US$1.5 billion under management, said it was “definitely a move in a positive direction.”
The rate increase was not a surprise and this is an indication of a sound monetary policy objective being applied, he said.
“Clearly, a rise in the base rate will mean a rise in all sorts of interest rates. It is a good thing for depositors.
“Borrowers will have to pay more and clearly that will put them in a more difficult position. The government is doing the right thing. Monetary policy or macroeconomic policy needs to be flexible and adapt to the circumstances.’’
Asked about the government’s 2 percent devaluation of the dong, he said: “The government is showing an increase in flexibility in its approach to currency management.
The general supply and demand situation is in favor of the dong, not against the value of the dong.’’
‘Risky move’
Weakening the dong “is a risky move for it is likely to worsen inflation pressures and lower confidence in the currency,” wrote Sydney-based Chan and Philadelphia-based Tu.
“Greater exchange rate flexibility may benefit the financial markets over the medium term and must be administered carefully during this difficult period.’’
Government spending reductions this year are in the right direction and more are needed to cool the economy, the economists said.
The nation will reduce expenditure by 10 percent, or VND14 trillion ($842 million), Minister of Planning and Investment Vo Hong Phuc said June 6.
Thanhnien
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