Vietnam PM approves plan for tighter policy to fight prices

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Vietnam will restrain lending growth and narrow the budget deficit as Prime Minister Nguyen Tan Dung seeks to curb inflation and revive investor confidence in an economy that has devalued its currency four times in 15 months.

Dung cut the credit-growth target to below 20 percent from 23 percent for 2011, according to a resolution approved by the prime minister, which was presented by Deputy Prime Minister Nguyen Sinh Hung to government and central bank officials at a meeting in Hanoi on Thursday. He told ministries to narrow the budget deficit to less than 5 percent of gross domestic product this year and ordered a "cautious and tight" monetary policy.

The country's benchmark stock index has slid 6.7 percent in the past year and Moody's Investors Service, Standard & Poor's and Fitch Ratings cut Vietnam's sovereign-credit rating last year. Inflation accelerated to a two-year high of 12.31 percent this month, adding to signs of an overheating economy, and may be spurred further by higher electricity prices in March.

"The package of measures that the government just signed is still not strong enough and the main concern is that the general macroeconomy is still bad," said Cao Thi Hong, vice general director of Hanoi-based Vietnam International Securities Co. "Local investors are losing confidence while foreign investors remained net sellers in the stock market recently."

Rate increases

The central bank raised its refinancing rate by 2 percentage points to 11 percent last week, and boosted its reverse repurchase rate on February 22, joining neighbors from Thailand to China in tightening policy as inflation accelerates.

The economy showed signs of overheating in January, Ho Chi Minh City-based Viet Capital Securities said this month. The government expects economic growth this year of as much as 7.5 percent, up from a 6.8 percent pace in 2010.

The central bank devalued the dong on February 11 to curb the nation's trade shortfall and narrow the gap between official and black-market exchange rates. The devaluations raise the risk of higher import costs, while a planned increase in power tariffs of about 15 percent next month may also spur prices.

"Concern about inflation is just one issue," Pham Thanh Thai Linh, Hanoi-based head of market strategy at Bao Viet Securities Co., a unit of Vietnam's biggest insurer, said by phone on Thursday. "The overall situation is monetary policy tightening, so the upside for stocks will be much less, while other investment channels, like gold or foreign-exchange, are more attractive."

Gold trading

PM Dung's resolution asked the central bank to slow the growth and proportion of lending in non-productive sectors, especially property and stock trading.

The central bank will "gradually" restrict and abolish trading of gold in non-jewelry form in the "free market," according to the resolution. Dung will instruct ministries and provinces to reduce public spending by 10 percent for the next nine months.

State-owned companies will be ordered to focus their capital on their main businesses, and the Ministry of Industry and Trade will consider reducing and exempting import tax on raw materials for some industries, including garment, textile, footwear, seafood and medical sectors, according to the resolution.

The central bank will manage interest rates and money supply flexibly, the resolution showed.

Dung also urged state-owned companies to sell dollars to the central bank to help control the dong exchange rate.

"How can you hoard US dollars when we are in this difficult situation?" he said, referring to state-owned companies, in his closing remarks at the meeting with ministries in Hanoi.

Policy shift

"The announcement of the Prime Minister's plan indicates a clear shift in policy stance from over-emphasis on growth towards stabilizing the economy," Deepak Mishra, the World Bank's lead economist in Vietnam, said in an e-mail on Thursday. "This augurs well for Vietnam's economy as it shows a strong resolve on the part of the government to address the macroeconomic vulnerabilities that have plagued the country for some time."

The measures, if implemented effectively, will help Vietnam to regain its macroeconomic stability "soon," he said.

The government's target to keep inflation at or below 7 percent this year will be difficult to meet, Thoi Bao Kinh Te Vietnam newspaper reported this week, citing Nguyen Tien Thoa, the head of price control at the Ministry of Finance.

Electricity prices will rise by an average 15.3 percent, starting March 1. Vietnam's Ministry of Finance raised petroleum prices including gasoline, diesel and kerosene, effective from Thursday.

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