Vietnam Devalues Its Currency to Boost Economy By Dow Jones Business News, June 27, 2013, 11:45:00 AM EDT
--Vietnam devalues dong 1% versus U.S. dollar
--Vietnam lowers ceilings on deposit interest rates
--Vietnam second-quarter GDP up 5% on year, faster than 4.76% growth in first quarter
HANOI--Vietnam on Thursday decided to devalue its currency 1% versus the U.S. dollar and cut the ceilings on deposit rates in an effort to gain a momentum for its economic growth, after reporting a slight acceleration in its gross domestic product growth in the second quarter.
The State Bank of Vietnam said in a statement the devaluation of the dong is aimed at helping improve the country's trade balance and boost state foreign-exchange reserves. The rate the dong trades against the dollar will be lifted to VND21,036 Friday from VND20,828, a level it has kept unchanged since November 2011.
The central bank said it will lower the ceilings on short-term dong-denominated deposits to 7.0% from 7.5% and the ceiling on U.S. dollar deposits to 0.25% from 1.0% for institutional depositors and to 1.25% from 2.0% for individual depositors, effective from Friday. This is the latest measure the central bank has taken recently to avert an economic slowdown, after having slashed its key policy rates eight times by a cumulative eight percentage points in little more than a year. However, the economy last year grew at its slowest pace since 1999, at 5.03%, due to weak demand and a high ratio of bad debts in the banking system.
The country's gross domestic product in the April-June quarter grew by 5% from a year earlier compared with 4.76% in the first quarter, government data released earlier Thursday showed. First-quarter GDP growth was revised down from 4.89%, taking first-half GDP growth to 4.9%.
The government said lower taxes and central bank-led interest-rate cuts have helped businesses. Earlier this month, the government launched a VND30 trillion (US$1.43 billion) package to provide soft loans to home buyers and developers to support the property market.
Vietnam last month also set up an asset-management company to help reduce nonperforming loans. A high ratio of bad debts in the banking system has prevented banks from boosting their lending despite the central bank's aggressive interest-rate cuts. The central bank said earlier this year the ratio was 7.8% at the end of 2012, slightly down from 8.82% at end-September.
Central bank governor Nguyen Van Binh said last week that total outstanding loans in the country increased by just 2.98% as of end-May compared with the end of last year, well short of a full-year target of 12% for the entire year.
"GDP growth in the second quarter is plausible given the current situation of weak domestic and international demand and low credit growth," Ho Chi Minh City Banking University economist Le Tham Duong said by telephone.
Mr. Duong said growth in the second quarter was attributed to the increase in the government's public investment and in the disbursement of foreign direct investment.
The government said Thursday that the economy is still facing numerous challenges, with the macroeconomy remaining unstable amid continuing upward pressure on inflation. Banks are still finding it hard to boost their lending, as progress in clearing bad debt is very slow, it said.
According to government data released Monday, Vietnam's consumer price index in June rose 6.69% from a year earlier, accelerating from a 6.36% rise in May and marking the fastest pace since February.
ANZ said Thursday after the government release that the GDP growth in the second quarter remains below potential and that it sees downside risks to its 5.6% full-year growth forecast for Vietnam.
"We expect the structural challenges faced by the banking sector to weigh on growth," the bank said in a note. "In our view, the approval of the state's asset management company, though beneficial, is not enough to clean the banks' balance sheets of non-performing loans."
Separately, Capital Economics also said Thursday that pick-up in growth from the first quarter doesn't mean that conditions are improving, adding that problems in the banking sector are likely to weigh on the economy, with growth over the next couple of years likely to remain well below that of Vietnam's recent past.
HSBC earlier this month trimmed its 2013 GDP growth forecast for Vietnam to 5.1% from 5.5%, citing softer domestic consumption and weak credit growth. It said growth wasn't expected to return to its previous rate--about 7% a year-- until fundamental challenges to the economy are addressed.
The government's Thursday data also showed that Vietnam ran a trade deficit of $1.4 billion in the first half of this year, compared with a surplus of $155 million a year earlier. The country's industrial production index in the first half rose 5.2% on year, while its retail sales rose 11.9%