Vietnam hikes rates; adjusts currency downward
By Lisa Twaronite, MarketWatch
Last update: 3:23 p.m. EDT June 10, 2008Comments: 3SAN FRANCISCO (MarketWatch) -- Vietnam's central bank tightened policy in the face of inflation Tuesday, and also adjusted its official exchange rate downward in an effort to thwart currency speculation.
The State Bank of Vietnam increased its refinancing rate on Tuesday to 15% from 13% and the discount rate to 13% from 11%. The central bank also said it would set Wednesday's official exchange rate at 16,461 dong per U.S. dollar, compared with 16,139 dong on Tuesday.
The dong is allowed to trade 1% above or below the official exchange rate. But last week, a dollar bought as much as 18,500 dong in the black market, as investors bought dollars to hedge against soaring prices.
"I think the implication of the move is that the effective spot dong rate might now appreciate a couple of percent, as it is still 4% to 5% above the new official rate," said James Malcolm, global emerging markets currency strategist at Deutsche Bank in London.
Last week, Moody's Investors Services cut its outlook on Vietnam's key ratings from positive to negative, becoming the third of the three major ratings agencies to cut their outlook on the country. See full story.
Moody's cited "policy shortcomings in addressing inflationary and balance-of-payments pressures."
Vietnam's inflation rate surged to 25.2% in May.
The interest rate and currency moves likely signal that the policymakers recognize the need for both a tightening and a foreign exchange adjustment, and are carrying it out in a gradual and controlled manner, said Win Thin, currency strategist at Brown Brothers Harriman.
"We think Vietnam can manage the adjustment process well, and really don't see any destabilizing hot money flows," Thin said, such as those that flooded into Thailand and other South East Asian countries during the 1997 Asian currency crisis.
"We believe policy-makers will continue to engineer a gradual depreciation of the dong as the year progresses, but not by a huge amount, as a big 30% devaluation would boost inflation even higher," said Thin.
Vietnam's stocks have tumbled more than 50% this year, making them the worst performer in their asset class, as the country struggled with inflation and a hefty trade deficit. Read more on Vietnamese stocks.
Against that backdrop, the dong has been dropping against the U.S. dollar since it hit a multi-year high of 1.5820 in late March.
Lisa Twaronite reports for MarketWatch from San Francisco.
