"The risk is that all the hard work they've done this year in trying to re-establish their stabilisation credentials and to try to convince the population that they have the discipline needed to push through with the macro stabilisation programme gets undone," Benedict Bingham, the IMF's senior resident representative in Vietnam, said in an interview yesterday.

At stake is Vietnam's struggle to regain investor confidence hurt by inflation that's exceeded 20 percent, a widening trade deficit and the near-bankruptcy of the nation's largest shipbuilder, which signaled risks in the banking industry. Its currency is Asia's weakest performer against the dollar this year after India's rupee.

Vietnam in February passed the so-called Resolution 11, which aimed to fight consumer-price growth and support the currency with tighter monetary and fiscal policies, and Bingham said that economic stabilisation programme isn't complete yet.

"There mustn't be a gap between the headline policy message that they're committed to maintaining this strategy until the job is done, and the actual implementation of monetary policy," Bingham said in HCM City. "People will pick these signs up, and raise questions about the strategy."

Dong Pressure

The dong weakened 0.2 percent to 20,850 per dollar as of 12:05 p.m. local time, according to data compiled by Bloomberg. It was devalued for the fourth time in 15 months on February 11. The VN Index of stocks closed down 0.2 percent.

The State Bank of Vietnam weakened the dong's reference exchange rate today to 20,638 per dollar from 20,628 per dollar, according to its website. It last adjusted the rate on August 24.

The currency is allowed to trade 1 percent on either side of the daily reference rate set by the central bank. On the so- called black market, it can move outside the band.

"We are seeing the dong trading outside of its band, by around 1 percent," said Bingham. "It's not under acute pressure, but it's drifted out."

The central bank earlier this year raised its discount, refinancing and repurchase rates in a bid to stem credit growth, check inflation and steady the economy.

In July, the State Bank of Vietnam bank cut its repurchase rate to 14 percent from 15 percent, and the following month it began pushing commercial lenders to lower their interest rates.

Policy Easing

The central bank will leave interest rates unchanged for now and consider cutting them if price gains slow, the government said in August.

The moves to ease monetary conditions echo efforts in recent months by emerging markets from the Philippines to Brazil to leave rates unchanged or cut borrowing costs, as Europe's debt crisis and the risk of a US contraction dim the outlook for the world economy.

Overnight interbank rates, which the central bank can influence through the supply of liquidity, are about 12 percent to 13 percent, Bingham said.

"The central bank's open market operations have left the banking system with an overnight rate below policy rates," he said.

About 49,000 Vietnamese businesses ceased operations or dissolved in January through September, a 22 percent increase on a year earlier, hurt by borrowing costs exceeding 20 percent, Nong Thon Ngay Nay newspaper reported.

Consumer Prices

Vietnamese consumer prices rose 22.42 percent in September from a year earlier, slowing from a 23.02 percent pace in the previous month while remaining the fastest inflation rate in a basket of 17 Asian economies tracked by Bloomberg.

Vietnam's government has also spent the last year wrestling with the near-bankruptcy of state-owned Vietnam Shipbuilding Industry Group, known as Vinashin.

The company's default on foreign-currency borrowings at the end of 2010 has raised doubts about asset quality at the country's banks, Moody's Investors Service said last month. Moody's, Standard & Poor's and Fitch Ratings all cut Vietnam's sovereign debt rating deeper into so-called junk status in 2010.

Vietnam's gross domestic product may rise 5.8 percent in 2011, the slowest pace since 2009, Asian Development Bank data show. The economy, a production hub for companies from Intel Corp. to Honda Motor Co., expanded 6.8 percent in 2010.

Bloomberg - 0ctober 6, 2011