Central bank raises benchmark rates

The State Bank of Viet Nam increased the prime interest rate by 1 percentage point yesterday to 9 per cent per year, the first increase in the benchmark rate in 11 months.

The move follows the State Bank's announcement yesterday of seven measures to try to cool inflation in the closing months of the year, when consumer demand traditionally rises.

The discount rate was also increased from 6 per cent to 7 per cent, while the refinancing and overnight interbank rates were hiked from 8 per cent to 9 per cent.

The increases, effective immediately, also follow yesterday's announcement from the Government that it would further not devalue the Vietnamese dong in the remaining months of this year.

Stocks rally after State sells off dollars

Investor remained confident this morning following the Government's order to sell US dollars yesterday, which helped stabilise the country's monetary market.

The move helped the stock market rally strongly on both of the nation's exchanges.

On the HCM City Stock Exchange, the VN-Index climbed by 1.85 per cent to 457.27. Market volume also increased as more than 36.9 million shares worth VND941.4 billion (US$47 million) changed hands.

About 20 shares declined while more than 200 shares advanced in value.

Most blue chips rose and of the 10 largest capitalised stocks, Eximbank (EIB) and property developer Hoang Anh Gia Lai (HAG) closed unchanged.

Financial and bank shares were actively purchased, while HCM City Securities (HCM) and PetroVietnam Finance (PVF) rose to their ceiling price. Sacombank (STB) also rose by 1.92 per cent, Vietcombank (VCB) increased by 1.17 per cent, and Sai Gon Securities Inc (SSI) rose by 3.78 per cent, of which the latter was the most active share with 1.9 million shares exchanged.

On the Ha Noi Stock Exchange, the HNX-Index climbed by 2.82 per cent to close today's session at 112.8.

Trading volume rose to nearly 29.3 million shares, worth VND544.6 billion ($27.2 million).

Advancers also largely outnumbered losers by 266-33.

PetroVietnam Construction (PVX) and Kim Long Securities (KLS) rose by 3.33 per cent and 4.13 per cent, respectively. The stocks were the most heavily-traded shares nationwide. More than 3.75 million PVX shares and 3.67 million KLS shares were traded today.

Transport Ministry allows My Thuan-Can Tho project

The Transport Ministry has approved plans for both the financing and construction of the My Thuan-Can Tho Highway.

Estimated cost of construction is VND6.08 trillion (US$296.8 million) which will be raised from the State Budget, foreign capital and domestic investors.

The ministry has also allowed the sale of land along the highway to raise money.

Work on the My Thuan-Can Tho Highway, part of HCM City-Trung Luong-My Thuan-Can Tho Highway project, is planned to begin in 2011. The 32.2 kilometres, six-lane road is scheduled to complete in 2016 with 12 bridges across the Mekong River.

State passes new regulations on rice exports

The Government issued a rice exports decree that will be implemented next year.

Under the decree, eligible rice traders must have legal trading certification, one warehouse to store at least 5,000 tonnes of rice, one rice mill that can process at least 10 tonnes of rice per hour and will have to follow additional standards that will be mandated by the Ministry of Agriculture and Rural Development.

Agricultural exports likely to fall in Q4

Viet Nam is unlikely to be able to boost its agricultural export turnover in the last quarter due to torrential rains in the central region.

Chief exports include rice, aquatic products, pepper and coffee.

As a result of the adverse weather, supply shortages have pushed up prices.

Global rice output in the 2010-11 crop will decrease by 2.1 million tonnes compared to the US Department of Agriculture's last month estimates for the year.

The average export price in October reached US$467.3 per tonne, an increase of 4.7 per cent over the same period last year.

However, last month's floods in the central provinces of Nghe An, Ha Tinh, Quang Binh, Quang Tri and Thua Thien Hue negatively affected their agricultural production, as did water shortages in the South.

The Ministry of Agriculture and Rural Development estimates that Viet Nam will export just 1.04 million tonnes of rice during the October-December period, as opposed to 1.44 million tonnes in the first quarter and nearly 2 million tonnes in the second and third quarters.

Vietnamese rice exports totalled more than 5.56 million tonnes, worth $2.35 billion, in the first ten months of the year, according to the Viet Nam Food Association. Rice exports are projected to reach 6.29 million tonnes in 2010.

Seafood exporters in Viet Nam would also face a shortage of materials for processing products for export because of the rough seas and floods in the central and Cuu Long (Mekong) Delta regions, the ministry said.

Meanwhile, seafood output from Asian countries such as Indonesia also declined, while demand and prices increased in Europe and Japan in the run up to Christmas.

However, the ministry said it expected the seafood export value to increase year-on-year by 14.7 per cent to $4.87 billion this year, despite the monthly export value estimatedly declining from $500 million in October to about $450 million in November and $420 million in December.

Poor weather also hit coffee supplies in the Central Highlands as farmers were unable to harvest their crops, the ministry said.

Meanwhile, pepper output also declined in Viet Nam and the rest of the world, while demand increased.

The ministry said Viet Nam's total pepper exports should reach 112,300 tonnes this year, lower than the initial estimate of 113,940 tonnes.

The export volume of pepper is likely to fall from 12,000 tonnes in July to 4,000 tonnes in December, the ministry added.

Soaring dollar challenges policymakers

The Vietnamese dong will be devalued two more times next year, bringing the official exchange rate by mid-year to about VND20,050 per US dollar, predicts the French-based bank Credit Agricole.

But the black market has no intention of waiting. The exchange rate among money dealers hit a record of VND21,070 yesterday. Commercial banks still posted the official exchange rate of VND19,500.

The large gap between the official and black market rates has stirred fears that the dong will continue to weaken against the dollar.

In theory, devaluation of the dong should help boost exports by increasing the competitiveness of the nation's exports, but it will also increase the costs of imports at a time when the country is already running a sizeable trade deficit – estimated by the Ministry of Industry and Trade this year at about $12 billion.

The dairy, garment, footwear, wood products, pharmaceuticals and plastics industries all depend heavily on imports for 70-100 per cent of their raw materials. The cement industry is also heavily indebted to foreign investors, so servicing loans in overseas currencies will also become more costly.

Policymakers have been grappling with why the dong has continued to weaken against the dollar, blaming rising inflation and public fears for driving people to withdraw idle cash from banks or securities to purchase more rapidly appreciating assets such as real estate or gold.

This has driven domestic gold prices to record levels in recent weeks and left commercial banks short of capital to lend to businesses to increase production.

Both businesses and individuals have also been hoarding their appreciating US dollars, with many exporters holding onto dollars they earn from export contracts rather than selling them back to the banking system.

To attract capital, commercial banks have also been forced to increase their deposit interest rates, further eating into bank profit margins and lowering the levels of capital available for lending.

Domestic businesses that earlier borrowed US dollars due to lower lending interest rates were now under higher pressure, as well, required to buy more expensive dollars in order to service the debts.

To try to close the gap between the official and black market exchange rates, the State Bank of Viet Nam this year has already twice devalued the dong by 5 per cent.

The public continues to wonder whether there is a real shortage of dollars. National Financial Supervisory Committee chairman Le Duc Thuy has said that about $20 billion was deposited in commercial banks, a figure that didn't include dollars in circulation.

The committee's vice chairman, Le Xuan Nghia, said the economy was not facing a shortage of dollars, but that individuals and enterprises were keeping their dollars, creating unrealistic pressures on the forex market.

If the State Bank were to further adjust the official exchange rate, inflation would soar, with adverse effects on the domestic economy. State Bank Governor Nguyen Van Giau affirmed on October 18 that the central bank had no intention of devaluing the dong further this year.

The only other available option for lowering the value of the US dollar on the market would be for the State Bank to inject more dollars into circulation.

Last week, when the black market exchange rate reached VND20,000, the central bank indicated it would begin pumping US dollars into the commercial banking system in order to ensure importers that they had sufficient dollars to pay for essential raw material, fuel and equipment imports.

The Government has also approved an overall package to try to stabilise the forex market, which includes voluntary limits on the ability of commercial banks to increase deposit interest rates and mandatory caps on lending interest rates, the National Financial Supervisory Committee announced yesterday. After the package was announced, the exchange rate dropped dramatically to VND20,080.

Thuy revealed that the State Bank increased its dollar reserves by $300 million in September while releasing another $200 million into the economy, measures that proved inadequate to stop the dollar's rise on the forex market.

Viet Nam has maintained high US dollar reserves due to its need to pay down its current account deficit, according to a recent World Bank report.

Stabilising the domestic monetary market is a critical long-term goal. If production can be stimulated, new jobs can be created and the costs of consumer goods kept under control. Nghia predicted that a weakening US dollar on global markets would help stabilise local exchange rates in the short term.

Source: VNS