By Van Nguyen
Nov. 25 (Bloomberg) -- Vietnam’s central bank devalued its currency and raised interest rates to rein in accelerating inflation and a widening trade deficit that is eroding confidence in the dong.
The State Bank of Vietnam lowered the reference rate 5.2 percent to 17,961 against the dollar, after the gap between spot and black-market rates widened to the most in a decade. Policy makers narrowed the dong’s daily trading band to 3 percent, from 5 percent, effective tomorrow. The unofficial rate offered at gold shops in Ho Chi Minh City is 9 percent weaker than today’s spot rate.
Vietnam raised the benchmark rate one percentage point to 8 percent, after inflation accelerated this month, the first nation in Asia to raise borrowing costs. The benchmark stock index had the biggest drop in more than seven months on concern higher lending rates will lower company earnings.
“The rate hike is targeted towards giving the Vietnamese dong more support and the devaluation is to help exports,” said Tai Hui, Singapore-based head of Southeast Asian research at Standard Chartered Plc. “The dynamics in Vietnam are completely different from other Asian economies.”
The dong fell 0.04 percent to 17,881 against the dollar as of 3:15 p.m. in Hanoi, about 5 percent weaker than today’s reference rate of 17,034. The benchmark VN Index dropped 4.5 percent, the most in more than seven months, to close at a three-month low of 503.41.
Inflation Expectations
The Southeast Asian nation is trying to sustain economic growth in 2010 and curb inflation, the statement said. The rate increase is to lower credit growth and meet economic targets, the central bank said.
Consumer prices gained 4.35 percent in November from a year earlier, the biggest increase since May, according to figures released by the General Statistics Office in Hanoi today. The trade deficit widened to $1.9 billion in October, the most since May 2008, from $1.8 billion in September.
Concern about a widening deficit and quickening inflation has prompted Vietnamese investors to buy gold and foreign currency. The gold price in Vietnam rose as high as 28.85 million dong ($1,613) per tael today, from 18.4 million dong at the start of the year. One tael is about 1.2 ounces of gold.
“They want to make sure that inflation expectations are anchored,” said Jaseem Ahmed, the Manila-based director of the Asian Development Bank’s financial sector, public management and trade division for Southeast Asia. “They are also probably trying to give a sense that people don’t need to worry about substantial movements in the exchange rate.”
‘Odd One Out’
Government bonds rose on speculation higher interest rates may slow inflation. The yield on the benchmark five-year note declined 14 basis points to 11.13 percent, the biggest drop since Sept. 3. A basis point is 0.01 percentage point.
Vietnam’s dong has fallen 2.3 percent this year, heading for a second annual decline. Amongst 10 Asian currencies tracked by Bloomberg, all except the Chinese yuan and the Hong Kong dollar have gained.
Policy makers around the region are leaving borrowing costs unchanged amid concern higher interest rates will encourage capital inflows that may boost their currencies and undermine financial stability.
“Most Asian governments and central banks are fighting and resisting currency appreciation and are talking about currency controls,” Standard Chartered’s Hui said. “Vietnam is the odd one out in Asia.”
Vietnam will also lift the refinancing rate to 8 percent from 7 percent, and the discount rate to 6 percent from 5 percent, according to the statement. The rate increases, the first since January, are effective from Dec. 1.
Black Market Rates
The dong traded at between 19,600 and 19,800 in the so- called black market in Ho Chi Minh City, according to a state- run telephone information service. The gap between unofficial rates and the spot rate has widened from about 5 percent at the start of the month.
The central bank kept the key rate at 7 percent since January to help the government meet its 5 percent economic growth target. The economy expanded 6.2 percent last year, the slowest pace in nine years. Inflation may accelerate to 6 percent by the end of the year, Deputy Prime Minister Nguyen Sinh Hung said last week. Credit growth in the 10 months through October reached 33 percent, exceeding the government’s 30 percent full-year target. “There are risks of inflation picking up,” Hung said in a Nov. 18 interview in Hanoi. “Since we wanted to boost economic growth, we injected a large volume of funds to businesses.”
To contact the reporter on this story: Van Nguyen in Hanoi at vnguyen23@bloomberg.net
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