Vietnam Devalues Its Currency, the Dong, to Aid Economy

Vietnam Devalues Its Currency, the Dong, to Aid Economy
Central Bank’s Move Follows Eight Cuts in Interest Rates

HANOI—Vietnam decided to devalue its currency 1% versus the dollar and cut the ceilings on deposit rates in an effort to give momentum to economic growth.
The State Bank of Vietnam said in a statement the devaluation of the currency, the dong, is meant to improve the country’s trade balance and boost state foreign-exchange reserves. Effective Friday, one dollar will bring 21,036 dong, compared with 20,828 dong now, the level since November 2011.
The central bank said it will also lower the interest-rate ceilings on short-term dong-denominated bank deposits to 7.0% from 7.5%. That will reduce banks’ funding costs, allowing them to lend at lower rates.
The ceiling on dollar deposits will fall to 0.25% from 1.0% for institutional depositors, effective Friday, and to 1.25% from 2.0% for individual depositors. The shift is meant to encourage people to exchange dollars for dong, giving the government more dollars to bolster its foreign-exchange reserves. Although commercial banks can hold a certain quantity of dollars, the State Bank of Vietnam is the biggest buyer.
The news came as the government reported a slight acceleration in gross-domestic-product growth in the second quarter. Economic output in the April-June quarter grew by 5% from a year earlier, compared with 4.76% in the first quarter. First-quarter GDP growth was revised down from 4.89%, taking first-half GDP growth to 4.9%.
The government said 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 devaluation and changes to deposit ceilings are the latest in a series of measures the central bank has taken recently to avert an economic slowdown. It slashed its key policy rate eight times by a cumulative eight percentage points in little more than a year, but the economy last year grew at its slowest pace since 1999, at 5.03%, due to weak demand and a buildup of bad debts in the banking system.
After announcing the growth figures, the government said lower taxes and the interest-rate cuts have helped businesses. Earlier this month, the government launched a 30 trillion dong ($1.43 billion) package to provide low-cost 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, which are preventing banks from increasing lending, blunting the impact of the central bank’s cuts to interest rates. The central bank said earlier this year that bad debts accounted for 7.8% of banks’ total assets at the end of 2012, compared with 8.82% at the end of September.
Central bank governor Nguyen Van Binh said last week that total outstanding loans in the country increased by just 2.98% from the end of 2012 through the end of May, well short of a 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 resulted from an increase in investment by the government and the disbursement of foreign direct investment.
The government said Thursday that the economy remains unstable, and cited continued inflationary pressure. Banks are still finding it hard to boost their lending, as progress in clearing up bad debts is very slow, it said.
In June, the consumer price index rose 6.69% from a year earlier, accelerating from a 6.36% rise in May and marking the fastest pace since February.
Australia and New Zealand Banking Group Ltd. said Thursday that GDP growth in the second quarter remains below potential and that it sees a risk that Vietnam won’t achieve the 5.6% growth the bank has forecast for this year.
“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 nonperforming loans.”
Capital Economics said Thursday that the pickup in growth from the first quarter doesn’t mean that conditions are improving. Problems in the banking sector are likely to weigh on the economy, keeping growth over the next couple of years well below that of Vietnam’s recent past, it said.
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—around 7% a year—until fundamental challenges to the economy are addressed.


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