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Vietnam may need to raise rates to support currency, IMF says
Vietnam may need to increase interest rates to bolster a weakening currency and slow credt growth, the International Monetary Fund (IMF) told government officials yesterday.
The IMF and the World Bank, in remarks Monday at a conference in the Central Highlands town of Buon Ma Thuot, also suggested that Vietnam phase out subsidies to bank lending as “rapid” credit growth threatens to stoke inflation.
The State Bank of Vietnam’s benchmark interest rate has been held at 7 percent since February, after being cut from 14 percent in October. The Vietnamese dong traded Monday at VND17,789 per dollar, down from VND17,483 at the end of 2008.
While focusing Vietnam’s monetary policy on supporting growth earlier in the year was warranted, moves such as the cutting of rates, an easing of fiscal policy and an interest-rate subsidy program may jeopardize the nation’s economic stability, the IMF said.
“Some tightening of monetary policy is needed to rein in credit growth, which has started to increase again, and provide greater support to the dong,” the IMF said.
“This tightening would best initially be achieved by monetary operations to rein in dong liquidity and through an accelerated phasing out of the current interest subsidy schemes,” the Washington-based agency said. “But an adjustment in policy rates may be needed if credit expansion continues to accelerate.”
In March, the Vietnamese government widened the amount that the dong can trade daily on either side of a fixed rate set by the central bank to 5 percent from a previous band of 3 percent. The State Bank reference rate was VND16,943 per dollar Monday.
Currency band
“Market participants report that a gap has emerged between the official rate for the currency and the free-market rate,” said Benedict Bingham, the IMF’s senior Vietnam resident representative, in a phone interview Monday from Buon Ma Thuot.
A report dated May 28 from Ho Chi Minh City-based fund managers Dragon Capital put the dong’s free-market exchange rate at about VND18,100 per dollar.
The gap with the official rate is “consistent with the fact that the dong has been at the bottom of the daily trading band for an extended period,” Bingham said. “We’re also hearing from market participants that there is a lack of liquidity in the forex market, which is making it difficult to buy dollars.”
Vietnamese monetary authorities were encouraged by the IMF to phase out the interest-rate subsidy program, a measure which the World Bank also called for Monday in a report to the Buon Ma Thuot conference. Dropping the program may help slow growth in credit and “ease pressure on the dong,” Bingham said.
Loan growth
The central bank will probably bear at least VND17 trillion (US$956 million) in costs from subsidizing loans as part of the government’s stimulus measures, the World Bank said in the report. Total lending under the program has reached VND332 trillion, the State Bank of Vietnam said June 5.
“The interest-rate subsidy scheme, which played an important role in the initial phase of the stimulus policy, has lost its justification,” the World Bank said in a report written by economists led by Dinh Tuan Viet and Martin Rama. “Credit is growing rapidly again.”
Sharp credit growth, as well as increases in commodity prices, may drive up inflation, according to the agency. Economic growth probably bottomed in the first quarter, when gross domestic product expanded 3.1 percent, the World Bank said.
Vietnam’s government is facing a “delicate balancing of growth and stability objectives,” the IMF said in Monday’s remarks. “A greater focus on maintaining macroeconomic stability is now necessary.”
Total outstanding banking loans increased 15 percent through mid-May from the end of 2008, Deputy Prime Minister Nguyen Sinh Hung told the National Assembly last month.
Lower interest rates have helped revive the construction industry and domestic consumption, the Washington-based World Bank said.
“Once the figures for the first half of 2009 become available, it might be good to pause and reflect on whether sustaining economic activity should remain the single priority,” Viet and Rama wrote in the report.
Inflation threat
The extra stimulus spending is “likely to have enduring macroeconomic effects in terms of greater inflation levels, increased budget deficits and increased pressure on the current-account and exchange rate,” said a separate report by the United Nations Development Program.
Inflation slowed in May to an annual rate of 5.6 percent, the lowest since 2004 and down from 28.3 percent in August.
“There are constraints on how much domestic finance can be raised, as shown by the recent experience with bond issuances,” the World Bank said. “There are also indications that upward price pressures are resurfacing.”
Vietnam’s State Treasury last week failed to sell VND1 trillion of bonds. The lending subsidies are stifling appetite for Vietnamese bonds, HSBC Holdings Plc said last month.
The World Bank recommended Vietnam set a target for loan growth that would avoid quickening inflation. The government should also watch for an increase in bad debt, the agency said.
The bulk of the loans channeled under the program are from state-owned banks, the IMF said in April.
“Policy lending is vulnerable to favoritism, may result in an inefficient allocation of resources and could eventually affect the quality of bank portfolios,” the World Bank said. “There are already some indications of an increase in the share of nonperforming loans.”
Moody’s Investors Service last month said it was reviewing four Vietnamese banks, including the second-biggest by assets, for a downgrade, citing lower interest rates and the probability of a higher default rate.
Lending caps
The IMF also echoed a call made last week by foreign banks in the country for Vietnam to eliminate all lending caps linked to the central bank’s benchmark rate.
Currently, financial institutions can’t charge lending rates that exceed the 7 percent base rate by more than 1.5 times, except for on consumer loans.
“The cap on lending rates is hindering bank operations,” the IMF said in Monday’s remarks. It should be lifted “as soon as possible,” the agency said.
VIETNAM’S ECONOMY HOLDING UP WELL AMIDST ECONOMIC SLOWDOWN
Donors expressed satisfaction with the government’s handling of the recent economic turbulence and vowed continued support at the one-day mid-year informal Consultative Group (CG) meeting for Vietnam held in the Central Highlands province of Dak Lak Monday.
At the meeting, organized by the Ministry of Planning and Investment and the World Bank in Vietnam, the government and donors jointly reviewed Vietnam’s recent macroeconomic orientations and policies and the social impacts of the recent economic slowdown.
High on the agenda were future challenges faced by Vietnam with regard to climate change, the importance of good governance, anticorruption efforts and ways to improve aid effectiveness.
Deputy Prime Minister Pham Gia Khiem briefed donors on the current situation in the fight against poverty in Vietnam amidst the economic slowdown, and called for further support.
“I would like to ask donors to pay attention to the fact that due to the economic difficulties, many households, who have escaped poverty, now face the risk of poverty relapse, and that erodes the efforts that the donors, the government and the Vietnamese people have exerted so far,” he said.
Japanese Ambassador Sakaba Mitsuo said Japan would announce its new official development assistance (ODA) package for Vietnam soon and that its ODA in the second half of this year would be US$830 million.
He also said projects to build a new terminal at the Noi Bai International Airport in Hanoi as well as highways would be accorded priority.
Delegates will assess the effectiveness of ODA-funded projects in Dak Lak Province today and visit several coffee and cocoa-processing plants.
thanhnien, bloomberg
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