Vietnam Set to Rely More on Higher Interest Rates

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Vietnam Set to Rely More on Higher Interest Rates, Goldman Says
By Seyoon Kim

May 19 (Bloomberg) -- Vietnam will likely depend on raising interest rates and limiting credit to cool inflation, Goldman Sachs Group Inc. said, two days after the central bank abolished a cap on deposit rates and lifted its benchmark lending rate to the highest since it introduced the base rate in 1998.

``Vietnam is clearly at a crucial stage of its cyclical management for inflation control and ensuring a soft landing of the economy,'' Helen Qiao, Hong Kong-based Goldman economist said in a report.

``We believe the central bank will likely rely more on higher interest rates and credit control to reduce domestic overheating pressures, while maintaining the fixed exchange rate with a moderate downward crawl against the U.S. dollar in 2008- 2009.''

In an effort to cool accelerating inflation, the State Bank of Vietnam said on May 17 it will increase the base rate to 12 percent from 8.75 percent effective today. Consumer prices that surged 21.4 percent in April, the most since at least 1992, and rate restrictions have hurt banks' ability to attract deposits.

Vietnam's commercial banks raised the rates they offer depositors to as much as 14.8 percent today.

The central bank's decision is a ``positive step'' to tightening monetary policy through ``market-oriented measures, which demonstrates the government's resolution in maintaining the policy priority on inflation control over growth,'' Goldman's Qiao said.

Goldman said today the risk of ``hard landing'' of the Vietnamese economy isn't big.

`Hard Landing'

``On balance, we do not think the risk of a hard landing is large enough to make it our baseline scenario,'' Qiao said. ``With a firm stance in holding tight monetary policy, we see a greater probability that macro stability can be maintained in Vietnam.''

Vietnam's Deputy Prime Minister Nguyen Sinh Hung said in April the government would reduce the 2008 economic growth target to 7 percent from a previous forecast of as much as 9 percent. Economic growth slowed to 7.4 percent year-on-year in the first quarter. The economy expanded 8.5 percent in 2007, the fastest rate since 1996.

Goldman forecast this year's GDP growth at 7.3 percent and annual average consumer price inflation at 19 percent.

Standard & Poor's Ratings Service earlier this month cut its outlook on Vietnam's credit rating to negative from stable, citing ``rising risks to macroeconomic stability from an overheating economy.''

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net
Last Updated: May 18, 2008 23:20 EDT
Source: http://www.bloomberg.com