Vietnam’s premature monetary easing is credit negative

The central bank’s move on July 4 to cut its refinancing rate, its de facto policy rate, by 100 basis points to 14.0% despite persistently high inflation will further unhinge inflation expectations and renew downward pressure on the local currency.

Although official foreign exchange reserves have stabilized since the implementation of tightening measures in February, Moody’s also see a heightened risk of a renewal in domestic capital flight. The authorities’ inability to stay the course with coherent stabilization policies is credit negative.

This instance of monetary easing reflects inherent weaknesses in Vietnam’s institutional capabilities.

While the SBV’s monetary policy decisions are not announced according to a pre-set schedule, this rate cut’s timing was particularly surprising given government and central bank officials’ recent pronouncements about their commitment to fight inflation. No statement detailing the rationale behind the rate cut was available, underscoring the SBV’s poor communication with the market.

In the absence of such a statement, Moody’s assume policymakers are again demonstrating their low tolerance for slower growth.

Starting in February, the government began implementing a slew of administrative measures to promote macroeconomic stability, including a 20% cap on credit growth for 2011, guidelines against credit provision to particular sectors such as real estate development and stock investments, and tighter foreign exchange restrictions.

In addition, policy rates were raised swiftly and steeply, pushing the refinancing rate to 15% from 9% at the beginning of the year. These tightening measures have already started to gain traction. Credit growth was set to decline even more to meet the 20% cap for the year. But tight monetary policy slowed first-half 2011 growth to 5.6% year-on-year and threatens the government’s 2011 6.0% GDP growth target.

Moody’s view is that macroeconomic stabilization will require additional policy tightening, not less. The government’s consistent and strong emphasis on combating inflation since February did stem domestic capital flight and preserve the value of the Vietnamese dong.

The parallel rate has closely hewed to the official rate since then, while foreign exchange reserves rebounded to $13.5 billion in May from a low of $12.0 billion in February. A renewed decline in official foreign exchange reserves would reduce Vietnam’s buffers to external shocks.

Given the sensitivity of its reserve position on confidence in the dong, the Vietnamese authorities risk jeopardizing gains recently made shoring up the balance of payments and averting a balance of payments crisis – Stoxplus.com

Tags: Vietnam banking industry, Vietnam finance, Vietnam financial