Vietnam trims key rates to bolster economy: central bank

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Vietnam's central bank announced cuts to key policy interest rates on Monday, in the latest move to stimulate a troubled economy whose banking sector remains saddled with high levels of bad debt.

The State Bank of Vietnam will trim the refinance rate by 1 percentage point to 8 percent and bring down the discount rate by one point to 6 percent, effective Tuesday, it said in a statement.

The reductions were the first of 2013, but the central bank cut rates six times last year. In late December, it reduced key rates by one percentage point.

After economic growth struck a 13-year low at 5.03 percent in 2012, there are signs Vietnam's economy is stabilizing, and bankers see chances for further reductions in rates.

"We expect another 100 basis point in rate cuts this year," JP Morgan Chase Bank said in a report on Monday after the central bank's announcement.

"We do not think that such a pace of rate cuts would be destabilizing or concerning given the contained inflation outlook, stronger current account and balance of payment positions, and the still soft economic and credit growth environment."

The central bank also requested lenders to reduce the maximum rate on short-term deposits in the local dong currency by 0.5 percentage point to 7.5 percent, and to reduce the maximum loan rate for the export and farm sector to 11 percent from 12 percent.

The government has projected economic growth of 5.5 percent this year, still way off the the near 7 percent annual average growth seen in the decade up to 2008.

The Ho Chi Minh Stock Exchange is one of Asia's best performing bourses having gained more than 18 percent this year, after spending a lengthy period in the doldrums.

Annual inflation is expected to ease to 6.64 percent in March, while improving exports helped the country post a trade surplus in 2012 for the first time since 1993.

But, Vietnam is paying the price for the excessive credit expansion that helped fuel its past high growth, with banks carrying large amounts of bad debt.

The government has made repeated promises to reduce rates and give businesses more access to much-needed loans.

The central bank said last month that non-performing loans had fallen to 6 percent of banks' total loans, from nearly 9 percent earlier, though many economists believe the levels of bad debt could be considerably higher.

Inefficient state groups, which contribute just more than a third of the gross domestic product, account for half of the banking system's loans.

Nearly 100,000 businesses have folded in the past two years as running costs climbed, unsold inventory piled up and struggling banks tightened their lending.

With customers unable to secure loans easily, the property market has also been badly hit and the government has vowed to take action to help revive the sector.

The central bank is also establishing an asset management firm to buy bad debt from banks, in order to try to restart lending and break the cycle.

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