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Vietnam raises dollar reserve ratios
Vietnam ordered lenders to set aside more dollars as reserves for the third time this year, aiming to steady the national currency and quell Asia’s fastest inflation.
The reserve-requirement ratio on U.S. dollar deposits will rise to 5 percent to 8 percent from 4 percent to 7 percent, effective September, the State Bank of Vietnam said on its website today without specifying an exact date.
Vietnam has struggled to damp an inflation rate that accelerated to 23 percent this month, threatening to hurt purchasing power and slow economic growth. Weakness in the dong has contributed to price pressures by raising import costs, and the central bank has clamped down on the use of dollars and gold as it tries to avert a fifth devaluation since November 2009.
“If we continue to see dollar borrowing, the risk is that whenever these dollar loans are paid back, that could create additional devaluation pressure on the currency,” said Tai Hui, Singapore-based head of Southeast Asian economic research at Standard Chartered Plc. “I think the lending growth on the dollar side has been extremely strong in the past few months.”
The dong, which was devalued by about 7 percent in February, the most since at least 1993, has slid 1.2 percent this month. It declined 0.1 percent to 20,834 per dollar as of 10:35 a.m. local time. The VN Index of stocks rose 2 percent as of 10:39 a.m., according to data compiled by Bloomberg, after the government said last week it may lower interest rates if inflation slows.
‘Limit Credit Growth’
The central bank said today it raised dollar reserve ratios “to limit credit growth in foreign currency” and “create conditions to stabilize the monetary and foreign-currency markets.”
Reserve requirements force commercial banks to park a proportion of their deposits with the central bank, reducing the amount of money available for lending.
Consumer prices in Vietnam increased 23.02 percent in August from a year earlier, the fastest pace among 17 Asian economies tracked by Bloomberg.
The nation has sought to curb credit growth and the budget deficit to tame inflation. The central bank has also raised policy interest rates this year, including a series of increases in its repurchase, refinancing and discount rates.
Rate Cut
The State Bank of Vietnam subsequently cut its repurchase rate for the seven-day term on July 4 to 14 percent from 15 percent. The cut risked confusing the market about the government’s desire to fight the climb in prices and restore economic stability, the International Monetary Fund has said.
“In the immediate future, the central bank will keep its policy interest rates unchanged and will consider reducing them to a suitable range if inflation slows,” the government said in a statement posted on its website on Aug. 25.
While Vietnam is still firmly pursuing steps to curb inflation, it needs to respond flexibly to economic developments, Deputy Prime Minister Vu Van Ninh said in last week’s statement.
“The Vietnamese government is very worried about the growth outlook,” said Christian de Guzman, a Singapore-based assistant vice president at Moody’s Investors Service. “In other countries you have the policy space to act on it -- you can cut some rates because inflation isn’t high. But with Vietnam, inflation expectations are clearly unanchored.”
The government also said the central bank will pursue a “cautious, tight and flexible” monetary policy this year, and reiterated the aim of less than 10 percent inflation next year.
Gross domestic product expanded 5.57 percent in the first six months of the year, lower than a revised 6.18 percent in the first half of 2010.
Credit Suisse Group AG gave Vietnamese stocks an “underperform” rating today, citing the risk of economic “instability” from stimulus-driven credit boom.
Vietnam is a manufacturing site for companies from Intel Corp. to Honda Motor Co. Pledged foreign direct investment fell 26 percent in the first eight months of 2011 from a year earlier, to about $9.5 billion, a government report showed on Aug. 26.
bloomberg
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