Slower inflation, narrower trade gap help dong, Citigroup says

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Vietnam's falling inflation rate and narrower trade deficit have helped build confidence in the nation's currency, Citigroup Inc. said.

Inflation slowed to 9.05 percent in May, easing for a second month. The country's trade gap narrowed in May to $750 million from $1.16 billion in April.

"Tighter policies helping curb credit growth, inflation and the trade deficit are having some impact on confidence in the Vietnamese dong," Johanna Chua, the Hong Kong-based head of Asian economic research at Citigroup, said in a June 11 note.

The currency is trading at 18,975 per dollar, having strengthened from 18,990 at the end of May. Vietnam may be able to sustain a "modest build-up of reserves in 2010 if confidence in the dong is sustained," the International Monetary Fund said in a report last week.

Concern that the dong would be devalued, inflation, a wide trade deficit and "loose policies" helped cause a hoarding of dollars in Vietnam in 2009 that cut into the country's foreign- exchange reserves, Chua said. Reserves have declined to the equivalent of about seven weeks of imports from less than 11 weeks in December, the IMF said last week.

Confidence in the Vietnamese dong is "gradually returning" and sales of dollars may cause the Asian nation's currency to strengthen, the World Bank said last week.

The country's foreign-exchange reserves have increased by $1 billion in the second quarter so far, the IMF estimated in last week's report, without giving an overall figure.

Slowing lending

The State Bank of Vietnam aims to reduce lending growth to 25 percent this year from 38 percent in 2009. Credit expanded about 8 percent in the first five months of the year, Thoi Bao Kinh Te Vietnam newspaper reported May 31, citing State Bank of Vietnam Governor Nguyen Van Giau.

Still, the central bank, which has held its benchmark interest rate at 8 percent since December, will try to encourage commercial banks to reduce their lending costs because current interest rates are at a level that hurts corporate profits, Deputy Governor Nguyen Van Binh said June 6.

"Premature easing is the key risk to unraveling dong confidence, leading to another round of reserve deterioration," Chua said.

Vietnam's monetary and fiscal policy has been hampered by "mixed signals," the IMF said in its note, adding that a "premature easing of policies" may disrupt the country's foreign-exchange market.

Vietnam's lack of clarity in policy and data hurts perceptions of the country, Chua said, citing the risk that Fitch Ratings may downgrade Vietnam's debt. In March, Fitch cited poor sentiment toward the dong in placing the rating on negative watch.

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