Vietnam should avoid reducing interest rates too soon as that may weaken its currency and raise questions about the government's commitment to fighting inflation, the International Monetary Fund said.
"It is important that monetary policy not be eased prematurely, because the recent improved sentiment towards the dong remains relatively fragile," Benedict Bingham, the IMF's senior resident representative in Vietnam, said in an e-mail Thursday. His comments are a summary of remarks he made at a Sept. 6 meeting in Hanoi attended by officials including Prime Minister Nguyen Tan Dung.
The State Bank of Vietnam will leave interest rates unchanged for now and consider cutting them if inflation slows, the government said last month as faltering US and European recoveries darken the outlook for Asian expansion. Vietnam's consumer-price growth accelerated to 23.02 percent in August, a 33-month high and the fastest pace in Asia.
"To bring interest rates down, the government needs to tackle the elevated inflation expectations and weakened sentiment towards the dong," Bingham said. Monetary policy should "continue to steer a steady course in the months ahead," he said.
The dong has weakened about 1 percent in the past month against the dollar, according to data compiled by Bloomberg. It was devalued for the fourth time in 15 months on Feb. 11, by about 7 percent, partly to help curb Vietnam's trade deficit. The benchmark VN Index of stocks climbed 2.1 percent today, buoyed by optimism commercial lending rates may decrease.
The central bank cut the repurchase rate for the seven-day term to 14 percent from 15 percent on July 4, after increasing it in nine steps from 7 percent at the start of November 2010. The State Bank of Vietnam yesterday ordered commercial lenders in the country to report on their progress in lowering borrowing costs, Thoi Bao Ngan Hang newspaper reported Thursday.
"The decline in interbank rates in recent months and the cut in the repo rate to 14 percent from 15 percent might be taken as signals of an easing of commitment to the monetary policy leg of the Resolution 11 strategy," Bingham told the Hanoi meeting attended by Dung.
The resolution, passed in February, called for a series of measures aimed in part at slowing inflation.
The initiative's initial success in bolstering and stabilizing the dong spurred an increase in the central bank's foreign-currency reserves to $15.1 billion at the end of June, Bingham said. Foreign reserves at the end of May were $13.5 billion, according to the lender's data.
The IMF also told the government that an increase in credit over the last four years has resulted in "overleveraged" companies and "some banks being exposed to that overleveraging."
The State Bank of Vietnam said this week it's considering proposals to aid smaller lenders, after Moody's Investors Service said Sept. 1 that the country's banks need more capital to cushion them against losses.
"Detailed work on banking reform needs to get under way," Bingham told the government leaders. "Specifically, the capital buffers in the banking system need to be increased and the problems affecting smaller, weaker banks in Vietnam need to be resolved."
Moody's retained its negative outlook for the Vietnamese banking industry. Domestic economic imbalances pose a risk to banks' asset quality and make funding more difficult, the ratings company said.
Gross domestic product in Vietnam, a manufacturing site for companies from Intel Corp. to Honda Motor Co., rose 5.57 percent in the first six months of the year. That's lower than a revised 6.18 percent expansion in the first half of 2010.