Vietnam Raises Bank Dollar Reserve Ratios After Dong Weakens to Record Low

Vietnam Raises Bank Dollar Reserve Ratios After Dong Weakens to Record Low

Bloomberg News, 9 April 2011



Vietnam’s central bank raised the amount of dollar deposits lenders must set aside as cash to curb the use of foreign currency in the nation and stabilize the dong. The reserve ratio on deposits held in the U.S. currency will increase by 2 percentage points to a range from 3 percent to 6 percent from May, the State Bank of Vietnam said on its website today. The monetary authority will also cap interest rates on dollar deposits at 3 percent for individuals and at 1 percent for non-credit institutions, effective April 13, according to a separate statement. Prime Minister Nguyen Tan Dung is striving to restore confidence in an economy that devalued its currency for the fourth time in 15 months on Feb. 11 to narrow the gap between official and so-called black market exchange rates. The central bank raised borrowing costs for the seces, growth will slow but inflation will be brought under control eventually.



The package of measures – known as Resolution 11 – certainly looks the part, with the government vowing to keep borrowing rates high until inflation has stabilised, curb credit growth and cut non-recurring, non-salary spending by 10 per cent. But, as Ayumi Konishi, the ADB’s country director, told beyondbrics: “the real test will come in the implementation.” While inflation is a growing challenge across the region, the causes and the scale of the problem are very different in Vietnam. Across Asia, capital inflows have driving prices higher while in Vietnam, rapid credit growth and wasteful spending by state-owned companies lies at the root of the problem. Investors and government officials in China are spooked out by annual inflation of 4.9 per cent.



But in Vietnam, consumer prices rose by 13.9 per cent year-on-year in March. The extent of the credit expansion in Vietnam over recent years has raised fears about financial contagion, especially in light of the problems at Vinashin, the state-owned shipbuilder that is unable to pay its foreign debt at present. The ADB noted in its latest update on the Vietnamese economy, which was released on Wednesday: “The large increase in the domestic credit stock, about $100 billion during 2007–2010, raises concerns over banking asset quality, as does bank exposure to real estate and state-owned enterprises.” Most investors believe that the government allowed economic problems to build up because it was reluctant to see growth slow in the run up to the Communist party’s key five-yearly congress, which was held in January. Politics and economics don’t always mix.
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