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Vietnam hikes interest rates and devalues currency

The central bank raises interest rates to 8% and devalues its currency – moves needed to keep inflation in check and growth on target.

Vietnam is first out of the gate in a race no one wants to be in. It is the first nation in Asia to raise interest rates in an effort to put a stop to rising inflation.

The State Bank of Vietnam will increase its benchmark interest rate to 8% from 7% as of December 1. This is the first increase since January, as for most of the year the government has been focused on achieving its 5% economic growth target. And indeed, while analysts said the hike was needed it was also a surprise — the central bank had earlier announced that the basic interest rate would be kept stabilised at least until the end of the year.

“The move came as a surprise, well sort of. We did expect interest rates to increase, but expectations were for early next year. The fact that inflation came in today at 4.4% year-on-year against 3.0% year-on-year last month, and that the currency kept weakening in the black market (not to mention the surging price of gold internationally)… probably prompted earlier action than what we believe authorities would have liked,” noted Ho Chi Minh-based analysts at VinaSecurities in a research report issued last night.

The State Bank of Vietnam also reset the US dollar reference rate to 17,961 dong from its current level of 17,034 dong, in its third devaluation of the currency in two years. The central bank will also narrow the trading band of the dollar against the dong to 3% from 5%.

This is an effort not only to bring confidence to the currency, but also to correct the difference versus where the dong is trading on the black market, which has been at about 19,700 per US dollar in recent weeks. The governor of the State Bank of Vietnam, Nguyen Van Giau, acknowledged to Vietnamese press on Wednesday that foreign currency is now overly hot and so the government had to intervene.

Investors were spooked by the moves, with the Ho Chi Minh City Stock Exchange’s VN Index falling 4.5% to a three-month low of 503.41, the biggest slide since April 20. But most analysts praised the government’s efforts as prudent.

At 4.4%, consumer price inflation is at its highest since May and more than double the multi-year low of 2% in August. The food part of the basket registered 3.5% inflation, up from 2.5% in October. Housing inflation rose to 8.4% from 2.4%, while transport/communication inflation went from -4.6% to 2.2%. Inflation isn’t a worry — it has arrived.

Also consider that total outstanding loans are currently up 34% versus this time last year, which means the nation is grappling with a rising credit problem. Non-performing loans, of course, have long been a concern.

“In summary, inflation is heading higher which, together with the recent and alarming deterioration in the trade deficit and associated downward pressure on the currency, has finally triggered a policy response from the authorities. The response is also most unlikely to be the last,” wrote Robert Prior-Wandesforde, senior Asian economist for HSBC, in a research note yesterday.

Other moves bandied about by specialists include the Ministry of Finance raising import tariffs and the Ministry of Industry and Trade taking measures to limit imports.

While Vietnam’s currency issue is unique, the inflation issue is potentially not. China, South Korea and Taiwan will no doubt have to start raising rates next year as their stimulus efforts to spur growth may also lead to inflation.

Source: FinanceAsia.com, 26.11.2009

Filed under: Asia, Exchanges, News, Vietnam, , , , , , , , , , , , , , , ,

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