Vietnam's Pressure on Banks to Cut Rates May Damage Confidence, IMF Says
Vietnam’s “repeated” calls for commercial banks to lower their lending rates after tightening policy may damage market confidence, the International Monetary Fund said.
Vietnam began tightening monetary policy in November, terminating some loan subsidies and liberalizing policy on lending rates, the IMF said in a note posted on its website. This led to a slowdown in credit growth, the IMF said. Vietnam announced Nov. 25 it would raise its benchmark interest rate to 8 percent from 7 percent on Dec. 1.
The targeting of economic growth, while containing inflation, credit and money supply, may lead to “market skepticism” that all the goals can be achieved, the IMF said. “Maintaining a solid economic recovery will require the government to prioritize among its multiple goals.”
“They’ve got so many targets that they end up with contradictory policies because all the macroeconomic variables are interconnected and you end up with a confused picture,” Adam McCarty, chief economist at Mekong Economics in Hanoi, said in an interview today.
Vietnam targets 6.5 percent economic growth, 7 percent inflation, 25 percent credit growth, and a 20 percent expansion in money supply this year, the IMF said. The inflation goal has since been revised to 8 percent, the Washington-based IMF said.
‘So Many Targets’
“Inadequate clarity on government policies, exemplified by repeated statements by the government to favor lower commercial lending and deposit rates, while lowering short-term interest rates through its open-market operations, has undermined market confidence,” the IMF said.
Vietnam’s economy should grow about 6.5 percent this year and short-term capital outflows should moderate, allowing gross foreign-exchange reserves to rise to $15.4 billion by the end of 2010 from $14.1 billion at the end of 2009, the IMF said. Currency reserves were $23 billion at the end of 2008.
Growth and inflation should be presented as targets, while other economic variables should given as forecasts, Mekong Economics’ McCarty said.
Among concerns cited by Fitch Ratings when it cut Vietnam’s debt rating in July were an inconsistent economic policy. The credit-ratings company said Vietnam has a “track record of stop-go policy tightening and easing.”
Vietnam “needs to convince market participants that its priority rests with macroeconomic stability,” the IMF said.
The government’s immediate goal should be to maintain a stable exchange rate and rebuild foreign-exchange reserves, according to the agency.
Establishing Credibility
The IMF “believes that the government will be able to adopt a more flexible exchange-rate regime without risking resurgent devaluation pressures” once it has established its credibility for economic stability and rebuilt its currency reserves.
Vietnam’s central bank devalued the dong last month, following similar moves in February and in November 2009.
“A distinction should be made between the government’s actions, which are fairly consistent with good macroeconomic management, and their public statements, which seem to be all over the place,” said McCarty of Mekong Economics. “They are not disciplined about their macro policy pronouncements.”
To contact the reporter on this story: Jason Folkmanis in Ho Chi Minh City at folkmanis@bloomberg.net
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