Viet Nam Raises Its Benchmark Interest Rate to 12%

Saturday, May 17, 2008
Viet Nam will raise its benchmark interest rate, lifting the maximum return that commercial banks can offer depositors to 18% a year, the Southeast Asian nation's central bank said.
The State Bank of Viet Nam will increase the base rate to 12% from 8.75% on May 19, according to a statement released in Hanoi today. Under central bank regulations, banks cannot offer savers rates exceeding 150% of the base rate.
Viet Nam has sought to tame accelerating inflation by tightening credit and cutting the supply of money. Consumer prices that surged 21.4% in April, the most since at least 1992, and rate restrictions have hurt banks' ability to attract deposits.
``Today's move should help to ensure that banks have the mechanism available to them to mobilize more deposits,'' said Dominic Scriven, a director at Dragon Capital, a Ho Chi Minh City-based fund manager. ``That will help financial stability.''
The 12% cap on deposit rates before the rate rise has meant that real interest rates have been negative because of inflation, Scriven said. So-called real interest rates are returns paid on savings in excess of the inflation rate.
The State Bank of Viet Nam also said its discount rate will nearly double to 11% from 6%, while the refinance rate will be raised to 13% from 6%, according to the statement. The rates will also take effect on May 19, it said.
`Weren't Suitable'
``The rates haven't been changed since February and were not suitable with the market situation,'' Nguyen Van Giau, the central bank governor, said in a news conference today in Hanoi.
The central bank said on April 25 it didn't plan to increase its benchmark interest rate because month-on-month inflation showed recent policy measures were effective.
Viet Nam's bank lending rose 14.7% in the first four months, reaching almost half the 30% limit set by the central bank to reduce credit growth.
``Margins are decreasing with banks borrowing short at high interest rates and lending long, mostly at past lower rates,'' Vinacapital Investment Management Ltd., the Ho Chi Minh City- based manager of three U.K.-listed funds, said in a note this month posted on its Web site.
The amount commercial banks must set aside as reserves was raised in February to 11% for deposits of 12 months or less, from 10%. For dong and foreign currencies deposited for one year or more, the figure rose to 5% from 4%.
`Rising Risks'
Standard & Poor's Ratings Service this month cut its outlook on Viet Nam's credit rating to negative from stable, citing ``rising risks to macroeconomic stability from an overheating economy.''
``Given the unproven risk-management capability of domestic banks, an unexpectedly severe slowdown in economic growth could see sharply higher loan losses at many of these institutions,'' Standard & Poor's said in a May 2 report.
Viet Nam's Deputy Prime Minister Nguyen Sinh Hung said last month the government would reduce the 2008 economic growth target to 7% from a previous forecast of as much as 9%.
Gross domestic product growth slowed to 7.4% year- on-year in the first quarter. The economy expanded 8.5% in 2007, the fastest rate since 1996. (Bloomberg)