Vietnam’s macro policies on right track

Consumer price index (CPI) rose 2.21 percent in May, slowing down in comparison to 3.32 percent in the previous month. Deposit rates now do not seem to continue with jumps supported from re-financing cash flows.

The State Bank of Vietnam (SBV) has hinted to buy back US dollars after the dong/dollar exchange rate dropped to 20,600 dong/dollar.

Inflation may slow down

These developments of the market have suggested that the tight monetary policy of the central bank in recent months has been on right track. However, concerns remain as the trade deficit has continuously been increasing sharply to $6.5 billion and inflation has climbed near 20 percent year-on-year.

Confidence that CPI would slow down in the rest of the year has been markedly improved. This is because the world prices of goods is on a decline, US dollar is dropping sharply on world markets and the central bank continues tight monetary policy until late 2011.

The move of commercial banks has proved for the confidence of the market for slowdown of future inflation. Commercial banks began to buy government bonds again with winning almost 100 percent bond tenders on Thursday May 26, 2011.

Banks expect future interest rates to decrease significantly. This also means that many banks began to rely on monthly inflation that will cool down.

According to the latest tender results announced by Hanoi Stock Exchange (HNX), one trillion dong of three -year bonds and one trillion dong of five-year bonds in the tenders, there were 905 billion dong three-year bond and one trillion dong five-year bonds won by banks with the high interest rate of 13.3 percent and 13.2 percent respectively.

Interest rates remain high, but pressures is not big
Though the CPI in May dropped from the previous month, it remained high. Therefore, the task’s top priority for the central bank is to control inflation through a tight monetary policy. To keep the interest rate still high enough to control inflation, the central bank continues raising interest rates on the open market from 14 percent to 15 percent per year on May 17, 2011.

With interest rates ruling high, medium and small businesses will still have a limited access to credit, especially loans to agriculture – rural areas and export.

According to Resolution 11 of the government, these are the prioritised areas of credit. Therefore, the SBV’s operation of the interest rate in this period is to maintain appropriate interest rates to restrain inflation, but still make sure businesses of the above areas are able to access to capital resources from banks.

To be able to cope with this issue, the central bank must ensure small banks not to fall into a state of liquidity problem, causing interest rate races. In recent months, the central bank have made it through two channels of refinancing and buying foreign currencies.

Exchange rate reduces, SBV continues to buy dollars
In recent weeks, the dong/US dollar exchange rate between banks and customers continued to decrease. Compared with March 20, 2011, the exchange rate of Vietcombank (VCB) dropped nearly 200 dong. The buying price of banks was again well below the central bank’s buying rate at 20,600 dong/dollar.

Although the trade deficit in May continued to rise sharply over the previous months to the level of $1.7 billion, the exchange rate has been still slipping after the previous recovery. This is mainly due to foreign currency sources that businesses previously held are still plenty.

Tags: Vietnam economic, Vietnam economic growth, Vietnam economy, Vietnam economy 2011