Viet Nam Raises Interest Rate to Highest in Asia, Lets Dong Fall

Viet Nam increased the benchmark interest rate to the highest in Asia to cool the quickest inflation since at least 1992, and will allow the dong to weaken.

Governor Nguyen Van Giau will raise the base rate to 14% from 12% to stabilize the economy from tomorrow, according to a statement on the central bank's Web site. The bank also lowered the dong's reference rate for tomorrow by 2% to avoid currency speculation.

The rate increase may help restore confidence in the benchmark stock index, which has lost almost 60% this year and is the world's worst performer. Viet Nam faces a potential currency crisis because of spiraling inflation, according to Deutsche Bank AG and Morgan Stanley.

``This is good news for the market,'' said Dam Bich Thuy, Hanoi-based chief executive officer of Australia & New Zealand Banking Group Ltd.'s Vietnam unit. ``The move shows that the government is taking action to address investors' concerns.''

The rate increases are the third this year. The Southeast Asian nation also raised the refinancing rate to 15% from 13% and the discount rate to 13% from 11%, the statement said.

The State Bank of Viet Nam will set the dong's daily reference rate at 16,461 per dollar tomorrow, 2% lower than today's rate, it said. The currency is allowed to trade up to 1% on either side of the rate. The trading band will remain at 1%, the bank said.

Depreciation Pressure

``The exchange rate is under great pressure for depreciation although the Vietnamese government is trying to manage that very slowly,'' said Adam McCarty, chief economist of Mekong Economics Ltd. in Hanoi. ``They should probably do it faster than they are doing it, although they are trying to manage expectations.''

The dong fell 0.04% to 16,297.5 against the dollar as of 5 p.m. in Hanoi. The currency has weakened 2.7% in the past three months. Offshore 12-month non-deliverable dong forwards trade at 22,575 per dollar, Bloomberg data show, indicating traders are betting on a 28% drop in a year.

Morgan Stanley said last month that the dong is poised to weaken because Vietnam's current-account deficit may widen this year to an ``unsustainably large'' level. Vietnam will need an International Monetary Fund-style assistance program in coming months that may include a dong devaluation, Deutsche Bank said last week.

Stocks Slump

Stocks may extend this year's slump as the government raises interest rates, restraining earnings growth, Mark Matthews, Asia Pacific head of equity strategy at Merrill Lynch & Co. in Hong Kong, said in an interview last week.

The VN Index, a measure of 151 companies on the Ho Chi Minh City Stock Exchange, fell 1.61% to 373 today, extending its record losing streak to 24 days.

``Interest-rate increases are just one of the measures the central bank will take to reduce money in the banking system,'' said Nguyen Anh Tuan, deputy director of the investment banking division at the Viet Nam Bank for Industry and Trade in Hanoi.

Central banks in the Philippines and Indonesia this month increased borrowing costs to tackle surging food and energy prices. Viet Nam last week cut its growth target for this year and said it needed to prioritize getting inflation under control. Consumer prices surged 25.2% from a year earlier in May.

Viet Nam's central bank needs to push borrowing costs higher than the rate of inflation to prevent the economy from overheating, James McCormack, Fitch Ratings' head of Asia-Pacific sovereign ratings, said on May 30.

``Asian central banks are finally waking up to the fact that the inflation threat has to be dealt with before the need to support growth,'' said Callum Henderson, head of foreign-exchange strategy at Standard Chartered Bank in Singapore. (Bloomberg)