Vietnam’s central bank raised its reverse repurchase rate, the second increase in borrowing costs in less than a week, as Prime Minister Nguyen Tan Dung prepares to order tighter monetary and fiscal policies.
The State Bank of Vietnam raised the rate it charges commercial banks in daily open-market operations to 12 percent from 11 percent for the seven-day term today, Deputy Governor Nguyen Toan Thang said by telephone in Hanoi. Dung will sign a resolution tomorrow directing the central bank and ministries to curb inflation by tightening policy, said Le Xuan Nghia, an adviser to the premier.
Vietnam is under pressure to curb inflation that is poised to accelerate from a 23-month high as electricity prices rise and four currency devaluations in 15 months spur import costs. The nation raised its refinancing rate by 2 percentage points to 11 percent last week, joining neighbors from Thailand to China in tightening policy.
“If inflationary pressures are not curbed soon, they will eventually filter into wages and into the prices of manufacturing goods, affecting the overall competitiveness of Vietnamese exports,” Deepak Mishra, the World Bank’s lead economist in Vietnam, said in a telephone interview yesterday in Hanoi. “We remain worried that overall inflation is high.”
Prime Minister Dung will approve lowering the target for credit growth this year to about 20 percent from 23 percent in the resolution, Nghia said by phone today. There will be a series of general instructions and ministries and the central bank are expected to come up with detailed measures to carry out the directive, said Nghia, who is vice-chairman of the National Financial Supervisory Commission.
Stocks Fall
“Although the regulations for the new State Bank of Vietnam law have not yet been issued, we understand that the base rate will be de-emphasized going forward as a benchmark for monetary policy, and that attention will be focused instead on one of the other policy rates, most likely the repo rate, or perhaps the refinance rate,” Benedict Bingham, the International Monetary Fund’s senior resident representative in Vietnam, said yesterday.
Vietnam’s stocks dropped today, with the benchmark index completing the biggest two-day decline in 15 months, amid concern accelerating inflation will prompt the central bank to raise interest rates.
“The hike in the refinancing rate, electricity prices, and a possible increase in fuel prices will all add more costs to companies and affect their production,” said Hoang Thach Lan, a Ho Chi Minh City-based analyst who heads the brokerage unit at the Mekong Housing Bank’s MHB Securities Co. “All these show that the government has started pursuing tighter monetary policies and that will slow economic growth.”
Toxic Mix
The benchmark VN Index on the Ho Chi Minh City Stock Exchange sank 2.8 percent to 470.02 at the 11 a.m. local time close. Coupled with yesterday’s 4 percent plunge, that’s the sharpest drop over two days since November 2009. HAGL Joint- Stock Co., the nation’s second-biggest publicly traded developer, fell 2 percent while Bao Viet Holdings, the biggest insurer by value, slid by the daily limit of 5 percent.
The market has tumbled “thanks to a toxic mix of currency devaluation, high inflation and perceived inaction from the government,” Michel Tosto, director for institutional sales and brokerage at Ho Chi Minh City-based Viet Capital Securities, wrote in an e-mail yesterday. “Markets need clear and strong action and we’re not getting this at the moment.”
The country posted a trade deficit of $12.4 billion in 2010. The State Bank of Vietnam devalued the nation’s currency by about 7 percent on Feb. 11, the most since at least 1993, to curb the nation’s trade gap and narrow the difference between official and black-market exchange rates.
Devaluation Impact
Vietnam’s currency devaluation will likely reduce banks’ asset quality and capital as higher import costs lessen borrowers’ ability to service debt, Moody’s Investors Service said yesterday.
Vietnam’s inflation rate reached 12.17 percent last month, the highest level since February 2009. The government’s target to keep inflation at or below 7 percent this year will be difficult to meet, Thoi Bao Kinh Te Vietnam newspaper reported today, citing Nguyen Tien Thoa, the head of price control at the Ministry of Finance. Monthly inflation accelerated in the two biggest cities in February, online newswire VnEconomy reported yesterday.
Electricity prices will rise by an average 15.3 percent, starting March 1, Hoang Quoc Vuong, deputy minister of trade and industry, said yesterday.
Economic Instability
“Investors are selling stocks on concern accelerating inflation will lead to macroeconomic instability,” Giang Trung Kien, head of research at FPT Securities Joint-Stock Co., said by phone. The government may raise interest rates to withdraw money from circulation, hurting cash flow into the stock market, Kien said. Investors would also find it unattractive to borrow money from banks to invest in stocks, he said.
The IMF has urged Vietnam to “focus more decisively” on containing price gains and Moody’s Investors Service and Standard & Poor’s cut Vietnam’s sovereign credit ratings in December.
Nghia said the outlines of the prime minister’s instructions were first discussed in meetings in December, which were in response to international investors’ concerns about macroeconomic stability.
The central bank will come up with specific steps to implement the resolution in the “coming days” after the directive is issued this week, said a senior central bank official who declined to be identified because the information isn’t yet public. The plan will include measures to manage interest and exchange rates more flexibly in line with market rates, he said.
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