Vietnam stability hinges on slower credit growth, S&P says

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Vietnam's economic stability depends on the government keeping its pledge to slow credit growth, and it's too soon to conclude the situation is improving, Standard & Poor's said.

"The government's policy measures include tighter fiscal and monetary policies," Kim Eng Tan, a Singapore-based analyst at Standard & Poor's, wrote in a report dated April 11. "The risk that the government may not follow through on these measures is significant."

Prime Minister Nguyen Tan Dung has cut the target for credit growth this year to less than 20 percent from 23 percent and ordered a tighter monetary policy as costlier fuel and electricity and a weaker currency stoke inflation. The central bank raised its refinancing and repurchase rates on April 1 and plans to boost reserve ratios for dollar deposits in May.

"It's too early to conclude that the economic situation is stabilizing or even improving," wrote Tan. "The outcome depends on policymakers' ability to deliver on their promises."

Vietnam's inflation rate accelerated to 13.89 percent in March, the highest in 25 months, while the trade gap widened to $1.15 billion that month from a revised $1.11 billion in February, according to preliminary figures.

The nation's financial stability has been damaged by the fastest consumer-price growth in the region and persistent trade deficits, wrote Tan.

Financial distress

Potential financial "distress" has weighed on the government's creditworthiness, according to S&P, which cut Vietnam's sovereign-debt rating in December. It maintained its negative outlook on Vietnam's BB- long-term foreign-currency sovereign credit rating. Moody's Investors Service and Fitch Ratings also downgraded the country last year.

Vietnam's gross foreign-exchange reserves fell to $12.4 billion by the end of 2010 from $14.1 billion in 2009 and $23 billion in 2008, the World Bank said in March.

"Many businesses in Vietnam struggle to obtain foreign exchange for their operations," wrote Tan. "Vietnamese have been big buyers of gold and foreign currencies against the local currency, which has kept the dong exchange rate weak."

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