Vietnam starts unwinding stimulus

By Tim Johnston in Bangkok

Published: December 2 2009 16:37 | Last updated: December 2 2009 16:37

Vietnam plans to stop its interest rate subsidy scheme at the end of the year, becoming the first Asian nation to start unwinding its post-crisis stimulus programme, the government announced on Wednesday.

Analysts expect Vietnam’s gross domestic product to grow about 5 per cent this year in contrast to many of its neighbours, which are expected to see their economies shrink.

The government’s stimulus programme – which was touted at $8bn (€5.3bn, £4.8bn) but has actually cost nearer $4bn, or 4.3 per cent of GDP, according to the World Bank – has contributed significantly to growth. Its scheme of subsidising commercial loans by 4 percentage points met with particular success but will now finish at the end of the year, as planned, in spite of commercial pressure to keep it open until March.

“The termination of the program is in line with the interest-rate policy and the market stabilisation and will help businesses to increase their competitiveness,” Nguyen Dong Tien, the deputy governor of the State Bank of Vietnam, said in a statement.

The Vietnamese economy is heavily dependent on exports, which fell more than 14 per cent in dollar terms in the first eight months of the year. But the government bet their limited resources on a stimulus programme which concentrated on supporting industry to keep people in work, putting the country in a strong position to make the best of any upturn.

“This is a country that went the China route without China’s resources,” said Martin Rama, the chief economist for the World Bank in Vietnam.

The gamble seems to have paid off, with exports up last month 19 per cent year on year, industrial production rising 16.4 per cent; and retail sales up 30 per cent.

However, Mr Rama says the scaling back of the stimulus is timely.

“The interest rate subsidy scheme was very instrumental in the early days of the crisis,” he said but added that once the working capital requirements had been fulfilled, the take up-on loans had declined substantially and many of the companies that were latterly availing themselves of the facility were using the loans to buy dollars and gold, putting downward pressure on the dong, the Vietnamese currency.

“It is going to be painful for some but the government are counting on that to make borrowers sell gold and dollars to pay the loans back,” said Mr Rama.

Vietnam hit the headlines last week with a 5.4 per cent devaluation of the dong and a 1 percentage point rise in the reference rate, moves that were made to address specific pressures on the currency. The country has generally come through the crisis much better than many analysts expected and by some measures is showing the world’s fastest growth.

Vietnam to cut prime rate

HANOI – VIETNAM’S central bank said on Thursday it would cut its key interest rate for a third time in a month, to 11 per cent, citing ‘the negative impact of the global financial crisis’.

The bank also reduced banks’ reserve requirements to free up credit.

The State Bank of Vietnam (SBV) had raised benchmark rates several times early in the year to fight double-digit inflation but it switched course in late Oct, launching a series of rate cuts to stimulate the economy.

The benchmark rate cut from 12 per cent and the reserve requirement reduction ‘aim to actively prevent the negative impact of the international financial crisis and economic recession”, said the bank in an online statement.

The monetary loosening since last month reverses a series of three rate hikes earlier this year, from 8.25 per cent to 14 per cent.

The government is trying to control inflation which has been in double digits all year and eased to 26.7 per cent in Oct.

Vietnam, a major exporter of manufactured goods such as clothing and footwear and commodities including rice, coffee and seafood, has been hit by downturns in the United States, Europe and other markets.

The Communist regime is aiming for annual economic growth of around 6.5 per cent for this year and next, down from 8.5 per cent last year.

The SBV said it would cut the refinancing rate to 12 per cent from 13 per cent and the discount rate by one percentage point to 10 per cent.

Overnight interest rates for electronic and compensation payments on the inter-bank market were to be reduced to 12 per cent from 13 per cent. — AFP