Vietnam lifts dollar reserve ratio to damp prices, steady dong

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Vietnam's central bank ordered lenders to set aside more dollars as reserves for the second time in less than two months, escalating the nation's fight to steady the dong and quell the highest inflation in Asia.

The reserve-requirement ratio on US dollar deposits will rise by 1 percentage point to a range from 4 percent to 7 percent, effective this month, the State Bank of Vietnam said on its website Wednesday, without specifying an exact date. Earlier Wednesday, it ordered state-owned firms to sell all the foreign currency they collect to banks from July 1.

Vietnam has urged less domestic use of dollars as it tries to steady the dong after devaluing the currency for the fourth time in 15 months on Feb. 11. Prime Minister Nguyen Tan Dung in February cut the credit-growth target and ordered a tighter monetary policy as he tries to tame inflation, revive confidence in the economy and prevent another credit-rating downgrade.

"The central bank wants to avoid having to devalue the dong further from now to the end of the year," said Alan Pham, chief economist at VinaCapital Investment Management Ltd. "Dollars also act as money, as a means of payment. So less money is tightening and means less economic activity."

The dong was little changed at 20,589 per dollar as of 6:06 p.m. local time, according to data compiled by Bloomberg. It was devalued by about 7 percent in February, the most since at least 1993, to try and curb Vietnam's trade deficit. The benchmark VN Index on the Ho Chi Minh City Stock Exchange ended the day up 3.4 percent at the 11 a.m. local close.

Interest rates

The monetary authority on April 9 boosted reserve-requirement ratios for dollar deposits by 2 percentage points, effective May. It has also capped interest rates payable on U.S. currency deposits at 1 percent to 3 percent.

The State Bank of Vietnam on May 17 increased its repurchase rate for the seven-day term to 15 percent from 14 percent, the sixth increase this year.

On April 29, it boosted its refinancing rate for the fifth time since the start of November to 14 percent from 13 percent, and lifted the discount rate to 13 percent from 12 percent. The increases in the refinancing and discount rates were effective May 1.

Inflation surged to a 29-month high of 19.78 percent in May, stoked by fuel and electricity prices. That's the highest among 17 Asian economies tracked by Bloomberg.

Gross domestic product rose 5.43 percent in the three months through March from a year earlier, slowing from a 7.34 percent pace in the fourth quarter of 2010.

Dung said in February that he aims to curb credit growth to less than 20 percent this year from an earlier target of 23 percent. He also intends to narrow the budget deficit to below 5 percent of GDP and cap the jump in money supply at 15 percent to 16 percent in 2011.

Vietnam is aiming for annual average economic growth of 7 percent over the next five years, Dung said May 5 at an annual gathering of the Asian Development Bank in Hanoi.

Fitch Ratings, Moody's Investors Service and Standard & Poor's cut the nation's sovereign-debt rating in 2010 deeper into so-called junk status.

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