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June 28, 2008

Vietnam: Not applying for IMF loan programme

Vietnam is not seeking an International Monetary Fund loan program to deal with pressures from economic overheating, contrary to market rumors, a senior World Bank official said on Thursday.

"There have been rumors in the market that Vietnam was going to the IMF, and that is not true," Jim Adams, vice president for the East Asia and Pacific region, told Reuters.

He said there are concerns about overheating problems in Vietnam, arising from rapid credit growth in 2007, and rising inflation, but added that the government has responded "appropriately" in raising interest rates.

"We feel very confident about the medium term," Adams added.

Earlier on Thursday, Vietnam doubled the trading band for the dong, yielding to market pressure for currency depreciation even though it was likely to stoke inflation.

Annual inflation accelerated to 26.8 percent in June, driven by a jump food prices. The trade deficit, which is raising pressure on the currency, nearly tripled for the six months through June on soaring oil, steel and chemical imports.

"All these are forces -- high inflation, wider trade deficit -- weighing on the currency and this move is unlikely to change the state of affairs any time soon until we see inflation coming down significantly," said Prakash Sakpal, regional economist at ING in Singapore.

Vietnam is in its eighth month of double-digit inflation, giving the Communist Party government its biggest economic test since market liberalisation began in earnest in the mid-1990s.

The government and the central bank have tried to bring prices under control with three interest rate increases this year.

They have also raised the reserve requirement for banks, widened the trading band of the closely managed dong and effectively devalued the currency by 2 percent earlier this month.

In the latest directive, the dong would be allowed to rise or fall 2 percent from a daily rate set by the central bank compared with 1 percent earlier, State Bank of Vietnam Governor Nguyen Van Giau said on the central bank's web site (

The central bank also banned the trading of dong/dollar via a third currency such as the euro, Giau said. The central bank does not regulate the dong's exchange rate versus other currencies such as the euro.

Reflecting concerns about Vietnam's economic woes, investors in the offshore forwards market are pricing in a 28 percent depreciation of the dong in one year.

Dong depreciation could fuel inflation by making imports more expensive at a time of record prices for oil and other commodities. It would help cut the trade deficit by reducing demand for imports and making exports cheaper.

The trade deficit for the six months to June 30 was estimated at $14.78 billion compared with $5.2 billion a year ago, the General Statistics Office said.

Imports soared 60.3 percent to $44.7 billion with steel, oil products, plastics and fertiliser leading the way. Exports in June were estimated at $5.5 billion and imports at $6.8 billion, leaving a monthly deficit of $1.3 billion, down from $2.85 billion in May, the Statistics Office said.

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