Vietnam May Have Cut Policy Rates Too Quickly, IMF Says

Vietnam still faces inflationary pressures, according to the International Monetary Fund, which said it would have preferred a slower pace of interest-rate cuts last year by the country’s central bank.

The State Bank of Vietnam reduced borrowing costs for a sixth time last year on Dec. 24, two weeks after the IMF said the central bank should maintain its policy rate. The refinancing rate was cut to 9 percent from 15 percent at the beginning of the year, while the discount rate and the cap on dong deposits were also lowered.

Gross domestic product grew at the slowest pace in 13 years in 2012 as a slump in bank lending damped domestic demand, even as the inflation rate slowed to 6.81 percent in December from 18.13 percent at the end of 2011. Monetary policy must focus on ensuring that economic stability gained in 2012 can be maintained this year, said Sanjay Kalra, IMF’s resident representative for Vietnam.

“Going forward, there is still a case for being a little bit more careful,” Kalra said at a conference in Ho Chi Minh City today. “In terms of the balance of risks, it is perhaps advisable to be a little bit late in terms of reducing policy rates than being a little bit too early,” he said.

The Ho Chi Minh City Stock Exchange’s VN Index rose 0.6 percent today to the highest level since May 14. It has surged 23 percent from a 10-month low on Nov. 2. Two-year bonds rallied, causing the biggest weekly drop in yields since August.

Vietnam’s economy may expand about 5.5 percent in 2013, the government said last month. Moody’s cut the nation’s credit rating in September, citing “more pronounced weaknesses in the banking system,” while the World Bank has said the country is susceptible to a “premature loosening of policies” that could lead to a resurgence of inflation.

Flood the System

“Easing monetary policy will only flood the banking system with liquidity,” Kalra said. “Only if the problems in the banking system are solved can credit growth resume.”

The health of Vietnam’s banking system is a growing concern, the World Bank said in December, citing deteriorating asset quality and slow progress in restructuring. The sector is a “large source of risk,” given an increase in non-performing loans and uncertainty about them, Fitch Ratings said last month.

“The efforts that are being made in terms of solving the problems of the banking system are good, but a whole lot more needs to be done,” said Kalra. Vietnam needs “to show that it can engage in very serious structural reforms,” he said.

The government has pledged to accelerate the restructuring of state-owned enterprises and said it plans to form an asset manager to clean up lenders. Vietnam last year posted its first annual trade surplus in two decades of $284 million, helping the dong gain almost 1 percent against the dollar in 2012.

While there was a “substantial” increase in foreign-exchange reserves in 2012, the level is still insufficient by international standards, Kalra said. The stable exchange rate of the dong is a “favorable” development, he said.

“Confidence in the dong is not a question of one year, two years, or three,” Kalra said. “It is something that needs to be built over a long period of time.”

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