Vietnam will be 'very cautious' with more rate cuts

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Vietnam's central bank will be "very cautious" in considering further interest rate cuts because the wrong move could trigger high inflation and currency instability.

The monetary regulator doesn't expect to lower the dong deposit rate further, as it may prompt depositors to switch from dong to dollars and gold, and fuel inflation, Central Bank Governor Nguyen Van Binh said during a National Assembly meeting broadcast live on state television Tuesday. The central bank has cut its key refinance rate five times this year.

"We did the right thing in lowering interest rates so far this year," Binh said, responding to questions from lawmakers. "We will be very cautious in cutting rates further."

Vietnam is struggling to boost a slowing economy while trying to prevent inflation, once the fastest in Southeast Asia, from picking up again. The central bank has cut interest rates and approved higher credit growth at banks to help businesses and spur economic growth.

Deputy Prime Minister Vu Van Ninh has said the country may miss its 6 percent growth target after the economy grew by 4.7 percent in the second quarter from a year earlier. Consumer prices may rise in August from July because of higher power and fuel costs, according to a statement by the Ministry of Finance on August 15.

Year-on-year inflation may rise to between 6 percent and 7 percent at the end of this year, Binh said Tuesday.

Bad debt

The State Bank of Vietnam said non-performing loans within the banking system reached 8.6 percent at the end of March.

"As the central bank governor, I take responsibility for this problem," Giau told legislators, referring to the high bad debt figure.

The governor, however, said that even though the bad loan level is alarmingly high, it should not be a cause for panic. During the 1998-2000 period, bad debts accounted for 47 percent of total loans in Thailand while the ratio was 17 percent in South Korea and 50 percent in Indonesia, he said.

Local banks have set aside VND70 trillion (US$3.36 billion) as bad loan provisions and 84 percent of non-performing loans are backed by assets whose combined value is 35 percent higher than the loans, Giau added.

Vietnam's bad debt is the highest by percentage among the six Southeast Asian economies covered by Moody's Investors Service, said Karolyn Seet, a Singapore-based assistant vice president.

"There's a lot of bad debt out there because a lot of loans were made for projects that haven't worked out," said Jonathan Pincus, a Ho Chi Minh City-based economist at the Harvard Kennedy School's Vietnam program. "Lending decisions were made because of relationships and connections rather than because of the quality of the projects themselves."

Nguyen Thi Kim Ngan, vice chairman of Vietnam's National Assembly, said the central bank needs to quickly help weak lenders to prevent the system from collapsing.

Speaking to the assembly, Binh urged commercial banks to boost lending to help businesses while maintaining standards to avoid bad debts.

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