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Vietnam to hike banks' forex reserve ratio

Vietnam's central bank said it will raise compulsory reserve ratios for foreign currency deposits from next month, the third increase this year as it strives to shore up the local currency and discourage the use of dollars.

The move will effectively make it more expensive for banks to deal in dollars, which make up the bulk of foreign currency deposits in Vietnam. The State Bank of Vietnam has capped the dollar deposit rate at 2 percent as of June.

"This is very much in keeping with their overall policy of making it less attractive to hold dollars," said Alan Pham, chief economist at the brokerage VinaSecurities.

"I think the purpose is really to stabilize the FX market and to strengthen the dong."

The central bank said it would raise the reserves banks must set aside on their non-term foreign exchange deposits and those with terms up to 12 months to 8 percent from 7 percent.

The rate for compulsory reserves on foreign currency deposits with terms longer than 12 months was raised to 6 percent from 5 percent, the central bank said in a statement.

The new ratios will come into effect for deposits from September, it said.

In a separate statement the State Bank of Vietnam said it would maintain the 14 percent ceiling rate on dong deposits until year-end to help lenders reduce lending rates.

The ceiling, a degree of control by Vietnam's central bank over the commercial loans market, was imposed on March 3.

The central bank's pledge to keep the deposit rate ceiling came after the government urged it to hold policy rates for now and deploy monetary tools "flexibly" for the rest of 2011 to trim price pressures.

The move will allow banks to reduce their lending rates to a targeted 17-19 percent range as of mid-September, the State Bank of Vietnam said in a statement after a meeting with banks last Friday.

Narrow forex rate move

It also pledged to adjust the dong against the dollar within a 1 percent band by the end of 2011, based on an expected surplus of $2.5 billion to $4.5 billion in balance of international payments, the statement said.

Compulsory reserve ratios for dong-denominated deposits were left unchanged at 1 percent to 3 percent, depending on the time and type of credit institution.

A total of 12 banks, which altogether account for 80 percent of Vietnam's banking market, met with the central bank last Friday and agreed to cut dong loan rates.

Some economists say the move could hinder inflation-fighting measures. The government estimated last week that the annual consumer price index hit 23 percent this month, the 12th consecutive month of increases in the number.

The dong, meanwhile, has weakened in recent weeks after holding its ground in the wake of a devaluation in February, as demand for dollars -- used to settle gold import payments, both legitimate illicit -- rose in line with prices of the precious metal on domestic and global markets.

On Monday the dong slipped to 21,120/21,200 per dollar from 20,920/20,970 a week ago and 20,570/20,620 a month ago on unofficial markets.

Last Tuesday the central bank authorized at least one domestic firm to import more gold to help cool soaring prices, after having allowed an import of 5 tons of gold in early August.

When gold demand rises in Vietnam, dollar demand rises in tandem, putting the dong under pressure to fall.