Vietnam to ease exchange-rate rules to help fight inflation
HANOI—Vietnam will follow a more flexible exchange-rate regime next year while using monetary policy to curb inflation, the central bank said Wednesday, signaling a possible interest-rate increase and another devaluation of the dong.
State Bank of Vietnam Gov. Nguyen Van Giau said the exchange rate will be based on market conditions and interest rates, and should be used to help boost exports and reduce imports, which have put pressure on the country's spiraling trade deficit.
Vietnam's economy remains burdened by inflation—which hit 11.75% in December, its fastest pace since February 2009—and a trade deficit that reached $12.375 billion for 2010. These have undermined the dong, forcing authorities to devalue the currency three times since late last year.
A lack of clear policies and uncertainty about Vietnam's economic stability have raised alarm bells among ratings agencies.
Standard & Poor's Ratings Services last week cut Vietnam's local and foreign currency ratings due to concerns about the country's banking system.
That came a few days after Moody's Investors Service downgraded Vietnamese government debt, in part because of concerns about the debt woes of state-run Vietnam Shipbuilding Industry Group, known as Vinashin. In July, Fitch downgraded Vietnam's long-term foreign and local currency ratings.
The State Bank of Vietnam lifted its benchmark rate on dong-denominated loans by 1 percentage point last month, and the government has unveiled a series of new policies to ease inflationary pressures, albeit to little effect.
The central bank has cut the dong's value by 10% against the dollar since last November. On Wednesday the dollar rate was set at 18,932 dong, though it was still commanding a premium of around 11% at gold shops, an indication that the dong remains overvalued.
Mr. Giau said authorities will coordinate monetary policy with fiscal and other macroeconomic measures in an effort to stem inflation and stabilize the economy.
His comments Wednesday, published on the central bank's website, came just two days after he said authorities are aiming to keep inflation below 3.5% in the first half of 2011 and below 7% for the year, while taking steps to reduce downward pressure on the dong.
Vietnam also will diversify the foreign currencies it uses in international trade, Mr. Giau said. Interest rates and exchange rates will be set at "appropriate levels" to ensure the safety of the banking system and effective management of the economy by the central bank.
Mr. Giau said money supply for 2011 is expected to grow 21%-24%, while banks' outstanding loans are expected to grow 23%. Money supply this year rose 23%, while outstanding loans rose 27.65%.
By Vu Trong Khanh - The Wall Street Journal - December 29, 2à10