DongA Securities' Wolfe Says Viet Nam Is Stepping Up Rate Moves

Lawrence Wolfe, director of business development of Ho Chi Minh City-based Dong A Securities Co., comments on the Vietnam central bank''s increase in benchmark interest rates to the highest in Asia to curb inflation and stabilize the economy. Wolfe made the comment via e-mail.

``The government has further intensified their efforts to stabilize the economy. Inflation has been the number one problem, especially since the inflation rate accelerated in May to 25%. Excessive credit growth has been one of the principal factors behind the rapid rise of inflation in 2007 and 2008.

``While the State Bank of Viet Nam has taken several steps to fight inflation, including instructing banks to limit credit growth to 30% this year, raising the compulsory reserve ratio to 11%, requiring banks to buy 20 trillion dong ($1.2 billion) worth of bonds and raising the base rate to 12% and the maximum loan rate to 18%, it became evident that those measures were still insufficient to curb inflation.

``This will also put further downward pressure on bank lending as fewer borrowers will be willing to borrow at the new higher rates.

``It is another positive step and was welcomed by most analysts as it reaffirmed the government''s determination to tame inflation even at the risk of slowing economic growth. Time will tell whether it was sufficient to restore confidence in the markets by the investing public.

``If we see that June''s inflation and trade deficit figures are lower than May''s and that the downward trend continues into the next few months, that will certainly do a lot toward restoring confidence. It is a process that takes time. The good news is that the government has acted when it needed to do so.''''

On the biggest drop for the dong since 1998:

``This has to be seen as a positive move to restore confidence in and stabilize the dong, which has been under pressure lately in the cash retail market to levels of 17,000 or even 18,000.

``So, you could say that it was a realistic and necessary step. This was a relatively small depreciation of less than 2 percent to 16,461 and it may relieve some of the pressure for further devaluation of the dong going forward, while the impact of the higher interest rates works its way through the economy.''''
http://www.vnstocknews.com/2008/06/donga-securities-wolfe-says-viet-nam-is.html