Vietnam Said to Consider Reserve-Ratio Rise to Damp Inflation

Vietnam is considering ordering banks to set aside more money as reserves, according to a government official with knowledge of the matter, as policy makers respond to an inflation rate that’s undermining investor confidence.

The measure is one of several that have been presented to Prime Minister Nguyen Tan Dung for approval this month, the official said this week, speaking on condition of anonymity because the proposal hasn’t been made public.

Vietnam has lagged behind nations from China to India in raising interest rates and reserve ratios to tackle inflation, which reached a 22-month high of 11.75 percent. The nation’s credit rating, already at so-called junk levels, was lowered by Moody’s Investors Service and Standard & Poor’s last month, spurring officials to consider steps to counter economic risks.

“Inflation management needs to be the number-one priority,” said Prakriti Sofat, an economist at Barclays Capital in Singapore. Sofat added that raising bank reserve requirements would need to be followed up with interest-rate increases and efforts to support the nation’s sinking currency.

The Vietnamese dong’s official exchange rate was 19,490 per dollar as of 4 p.m. in Hanoi yesterday, down from 19,099 before the most recent devaluation in August. On the so-called black market, it traded around 21,050 to 21,100 at money changers in Ho Chi Minh City, according to a telephone information service run by the state-owned Vietnam Posts & Telecommunications Group.

Lagging Behind

Most Asian currencies have advanced in the past two years as the region led the global economic recovery and spurred an influx of overseas capital. Indonesia’s rupiah has soared 20 percent, Thailand’s baht 15 percent and Malaysia’s ringgit 14 percent. The dong has tumbled about 10 percent.

Vietnam’s bank reserve ratios may be increased to as high as 10 percent for dollar deposits, and about 7 percent for dong deposits, the official said. They currently range from 2 percent to 4 percent for dollar deposits and 1 percent to 3 percent for dong deposits, according to the central bank’s website.

Other measures in the proposal include steps to bring down interest rates at commercial banks to reduce costs for companies so they can lower prices, the official said.

The increase in reserve ratios for U.S. dollar deposits would additionally help to boost Vietnam’s foreign-exchange reserves, the official said. The reserves were at a “low” level at the end of September, covering 1.8 months of imports, the International Monetary Fund said last month.

State Bank of Vietnam Governor Nguyen Van Giau didn’t pick up calls to his mobile telephone for comment.

Party Gathering
Vietnam’s Communist Party is scheduled to open a quinquennial meeting next week, a gathering that may help set direction for policy. VnExpress reported last month that the trade ministry wants the central bank to cut interest rates to support companies.

Vietnam’s weakening exchange rate has contributed to inflation by raising the cost of imported goods. The government has had to devalue the nation’s currency three times in the past 14 months, reflecting a lack of sufficient inflows of foreign capital to offset the nation’s trade deficit, which totaled $12.4 billion last year.
Moody’s said policy makers have been unwilling to tighten monetary policy effectively when it lowered the credit rating on Dec. 15. S&P said a credit boom and economic volatility had weakened the balance sheet of the country’s banks.

Rating Levels

Vietnam’s long-term foreign-currency rating is now B1 at Moody’s, four steps below investment grade. It’s an equivalent B+ at Fitch Ratings after a cut in July, and one level higher at BB- at S&P.

Dung’s government has so far favored stoking economic expansion over steps to rein in inflation, with growth accelerating to a year-on-year pace of 7.34 percent in the fourth quarter, adding pressure on the central bank to curb the jump in lending and prevent overheating.
The State Bank of Vietnam two months ago raised its so- called base rate to 9 percent from 8 percent, the first increase in almost a year.

The government is targeting an increase in gross domestic product of about 7 percent in 2011 and doesn’t expect inflation to exceed 7 percent.

--Nguyen Dieu Tu Uyen, K. Oanh Ha. Editor: Sunil Jagtiani, Stephanie Phang

To contact the reporter on this story: Nguyen Dieu Tu Uyen in Hanoi at uyen1@bloomberg.net.

To contact the editors responsible for this story: K. Oanh Ha in Hanoi at oha3@bloomberg.net; Stephanie Phang in Singapore at sphang@bloomberg.net