n, 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.
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 second time in less than a month on April 1 to curb inflation that has exceeded 10 percent for five months.
“These moves indicate further monetary tightening and discourage the use of foreign currency in the banking system,” Tong Minh Tuan, deputy head of research at Hanoi-based BIDV Securities Co., a unit of Bank for Investment & Development of Vietnam, said in an interview by phone Foreign-Currency Loans. “Foreign-currency liquidity at banks is ensured, but dollar lending rose at a level that is quite high,” the monetary authority said. “Even companies that don’t need to import goods preferred dollar loans,” BIDV Securities’ Tuan said. “With these moves, dollar lending will be limited to those companies with real demand for foreign currency.”
Domestic deposits in foreign currency at banks rose 19.5 percent in the first quarter and foreign deposits held in dollars increased 15.1 percent, the central bank said today. Foreign-currency loans increased about 13 percent in the first three months of the year, it said, without giving comparative numbers. Prime Minister Dung has intensified the fight against inflation this year by ordering a “tight” monetary policy and lowering targets for credit growth.
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