Vietnam moves to limit dollar hoarding, trade gap

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Vietnam lowered the ceiling on dollar deposit rates on Thursday in its latest attempt to limit the circulation of the US currency in the economy, which is struggling with a widening trade deficit and stubbornly high inflation.

The central bank said it cut the dollar deposit rate on bank deposits by individuals to 2 percent from 3 percent offered widely previously.

That ceiling applies to deposits by individuals, while the rate cap for institutional deposits is 0.5 percent, the State Bank of Vietnam said on its website (www.sbv.gov.vn), citing a circular issued on June 1.

The move followed two announcements on Wednesday in which the State Bank of Vietnam raised the reserves on foreign currency deposits banks must keep aside and also forced state-owned firms to sell their forex holdings to banks from July.

"If the central bank aims to de-dollarize and have a better forex management system, the set of polices is in the right direction", said Vu Thanh Tu Anh, a Harvard-graduated economist.

The actions announced on Wednesday will buttress efforts by the authorities to support the dong, although the Vietnamese currency has been more stable in recent weeks after a devaluation in February.

"These policies widen the interest gap between dong and dollar, making dong more appealing than dollars by higher deposit rate," said Anh, who is Director of Research at Fulbright Economics Teaching Program.

"Raising the reserve ratio will make dollar loans more expensive which would encourage lending in dong", Anh said.

State-owned companies have taken advantages by hoarding dollars from their export revenues.

"It's normal to force state companies to sell dollars to the state because it's from the state resources," Anh added.

Executives at state-run firms said they will have to comply with the ruling.

"We have been well-informed about the decision and will sell dollars. We will lose some benefit but it's all for the public interest,", said Deputy General Director Vu Manh Hung of the Vietnam Coal and Mineral Industry Group, Vietnam's top coal miner.

Economist Le Dang Doanh said the central bank's ruling to force state-owned companies to sell foreign exchange would help banks control foreign exchange flows and limit imports of luxury, which would help curb the trade deficit.

Vietnam's trade deficit in the first six months of this year could rise an estimated 19 percent from the same period in 2010 to $7.5 billion, exceeding the government's target, a state-run newspaper reported.

The growth of the Southeast Asian economy, which last month faced its highest inflation rate since December 2008, may quicken to an annual rate of 5.6 percent in the first half of this year, a state-run newspaper reported.

But Anh said the new policies would not influence the exchange rate or reduce the trade deficit because they would not boost the competitiveness of Vietnamese goods.

State firms can buy dollars from banks for legitimate demand as per the central bank's ruling released on Wednesday, and can have many technical ways to get their dollars out of the central bank's control, Anh said.

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