Lower interest rates not devaluing local currency

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  Dollar and dong notes seen at a bank in Ho Chi Minh City. Experts say the dong will remain stable through the end of the year.

The exchange rate between the Vietnamese dong and US dollar has remained stable despite large deposit interest rate cuts this year.

Shrinking demand for foreign currency, prompted by the slowing economy, is expected to keep the exchange rate from rising through the last quarter of the year.

The State Bank of Vietnam has reduced the interest rate cap imposed on dong deposits four times since the beginning of 2012. The rate has fallen from 14 percent to 9 percent this year.

Some have expressed concern that the lower interest rates could prompt depositors to withdraw dong deposits and then use the money to buy dollars and profit when the exchange rate increases.

However, Truong Van Phuoc, director of commercial bank Eximbank, said the rate cuts had not prompted people to withdraw their deposits. "The stock and property markets have not yet rebounded, while foreign currency has not seen sharp increases. Thus, bank deposits are still favored by many people."

"There is no reason to worry about people withdrawing their savings accounts en masse to buy dollars, creating pressure on the exchange rate," he said.

The exchange rate was VND20,890 per dollar on Thursday, compared to 20,840 on September 1, according to Vietnam's third largest partly-private lender Vietcombank.

The central bank has set the reference rate at 20,828, unchanged since December 26, according to its website. The currency is allowed to trade up to 1 percent on either side of the official rate.

Economist Bui Kien Thanh said foreign currency demand this year is not as high as in previous years, because many firms have reduced production, resulting in less demand for dollars to import materials and equipment. This can be seen in the smaller trade deficit, he said.

Vietnam had a trade deficit of US$62 million in the first eight months of this year, down from a deficit of nearly $8 billion during the same period last year, according to the General Statistics Office.

"In fact, Vietnam, amid slow credit growth and curbed inflation, could further lower interest rates without worrying about weakening the dong," Thanh said. "Foreign currency demand will not be large enough to raise the exchange rate."

If the dong interest rate is cut by two or three percentage points, it would still be attractive enough to depositors because the dollar interest rate is capped at only 2 percent, said an economist.

The exchange rate will remain stable at some VND21,000 per dollar, he said. "It will be difficult for the exchange rate to rise sharply this year."

The demand for foreign currency to repay debt could be met by higher foreign currency reserves, and overseas remittances, he said.

Vietnam's foreign exchange reserves increased by $10 billion in the first six months from $9 billion at the end of last year, said Prime Minister Nguyen Tan Dung.

He said the reserves will continue to expand and would be able to cover 12 weeks of imports by the end of the year, compared to 10 weeks at present.

There is no need for the government to seek loans from the International Monetary Fund or other countries to deal with economic issues, Dung said recently.

Vietnam's economic growth is expected to be 5.5 percent this year, before picking up to 6-6.5 percent in 2013.

The central bank has said the local currency will depreciate by 2 to 3 percent this year. The dong weakened 7.4 percent against the dollar last year.

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