Vietnam Devalues Currency and Raises Interest Rates

Vietnam Devalues Currency and Raises Interest Rates
By BETTINA WASSENER
Copyright by The New York Times
Published: November 25, 2009
http://www.nytimes.com/2009/11/26/business/global/26devalue.html?hpw


In a effort to combat inflation, rein in lending and bolster its currency, Vietnam raised its benchmark interest rate Wednesday and reset its official exchange rate. The move devalued the Vietnamese dong by more than 5 percent.

The interest-rate hike — from 7 percent to 8 percent — makes Vietnam one of only a few countries to have raised the cost of borrowing this year as the global economy has begun to stabilize.

The timing of the move surprised analysts, who had not expected Vietnam to start nudging up rates until early 2010. But it was widely welcomed as a sign that officials are addressing mounting inflation pressures and rapid credit growth, which have prompted property and stock prices to escalate fast.

This echoes the situation in many other developing Asian countries, notably China: Massive government stimulus and sharp interest-rate cuts in the wake of the global downturn propped up growth, but also had the undesirable side effect of prompting price hikes.

In Vietnam, rising prices of things like housing and food — in other words, inflation — have undermined the dong.

On official foreign exchange markets, the government confines the dong to a trading band. But on the black market, the dong has fallen sharply this year as savers, spooked by Vietnam’s history of high inflation, piled into harder currencies like the U.S. dollar as well as gold.

The central bank on Wednesday re-set the mid-point of the band to around 17,961 per U.S. dollar, effectively devaluing the currency by 5.44 percent. It also narrowed the official range in which the dong can trade, to 3 percent above or below the midpoint from 5 percent earlier.

In so doing, the authorities are trying to instill confidence in the dong and reduce the misalignment with the black market, where the dong has been much weaker, trading at 19,700 per U.S. dollar.

Vietnam’s stock market reacted negatively to the moves, falling 4.5 percent. But analysts expect further interest rate increases, because inflation pressures are expected to continue and because Vietnam’s economy has proven resilient amid f the global downturn.

One of Asia’s smaller economies, Vietnam is widely projected to see its gross domestic product grow about 5 percent this year. Inflation in November stood at 4.4 percent, and could rise to 6 or 7 percent by the end of the year, said Prakriti Sofat, regional economist at Barclays Capital in Singapore.

The momentum in the economy is strong, said Ms. Sofat, helped by the central bank’s previous interest rate cuts — totaling 7 percentage points — as well as $8 billion worth of stimulus from the government.

“I think the country can afford more tightening without choking off growth,” she added, saying she expected Vietnam to raise the cost of borrowing by another 2 percentage points in two steps, the first of which could come before the end of the year.

Economists also widely expect South Korea, Taiwan and China, among others, to start raising rates next year. Australia, Norway and Israel, whose economies are similarly buoyant, have all nudged up rates in recent months. And China has reined in lending by state-owned banks as part of its efforts to slow what it sees as excessive asset price rises.