Vietnam's Pressure on Banks to Cut Rates May

Damage Confidence, IMF Says

By Bloomberg News - Sep 8, 2010

The Vietnamese government’s “repeated” calls for commercial banks to lower their lending rates after
setting tighter monetary policy may damage market confidence, the International Monetary Fund said.

A shift in late 2009 and early 2010 of policy priorities toward macroeconomic stability saw the
Vietnamese government tighten monetary policy through measures such as squeezing liquidity,
terminating some subsidies on loans and liberalizing policy on lending rates, which led to a slowdown
in credit growth, the IMF said in a note posted on its Web site.

The government’s policy of targeting economic growth, inflation, and credit and money supply
expansion may lead to “market skepticism” that all the goals can be achieved, “especially if there’s no
apparent hierarchy of objectives,” the IMF said.

“Inadequate clarity on government policies, exemplified by repeated statements by the government to

favor lower commercial lending and deposit rates, while lowering short-term interest rates through its
open-market operations, has undermined market confidence,” the IMF said. “Maintaining a solid
economic recovery will require the government to prioritize among its multiple goals.”

Vietnam’s economy should grow about 6.5 percent this year and short-term capital outflows should
moderate, allowing gross foreign exchange reserves to rise to $15.4 billion by the end of 2010 from
$14.1 billion at the end of 2009, the IMF said. Gross foreign exchange reserves were $23 billion at the
end of 2008.

‘Incoherence’ Risk

“This baseline scenario is most sensitive to domestic macroeconomic stability, which could be
affected by perceived occasional incoherence between the government’s policy stance and its public
statements,” the IMF said. The Vietnamese government “needs to convince market participants that its
priority rests with macroeconomic stability.”

The government’s immediate goal should be to maintain a stable exchange rate and rebuild gross
international reserves, according to the agency.

“Once the government’s credential for macroeconomic stability is established, and gross international
reserves further built up, staff believes that the government will be able to adopt a more flexible
exchange-rate regime without risking resurgent devaluation pressures,” the IMF said.

Vietnam’s central bank devalued the dong last month, following similar moves in February and in
November 2009.
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