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Vietnam to raise dollar reserve ratios, cap deposit rates

Vietnam's central bank raised the amount of dollar deposits lenders must set aside as cash to curb the use of foreign currency in the nation and stabilize the dong.

The reserve ratio on deposits held in the US currency will increase by 2 percentage points to a range from 3 percent to 6 percent from May, the State Bank of Vietnam said on its website Saturday.

The monetary authority will also cap interest rates on dollar deposits at 3 percent for individuals and at 1 percent for non-credit institutions, effective April 13, according to a separate statement.

Prime Minister Nguyen Tan Dung is striving to restore confidence in an economy that devalued its currency for the fourth time in 15 months on Feb. 11 to narrow the gap between official and so-called black market exchange rates. The central bank raised borrowing costs for the second time in less than a month on April 1 to curb inflation that has exceeded 10 percent for five months.

"These moves indicate further monetary tightening and discourage the use of foreign currency in the banking system," Tong Minh Tuan, deputy head of research at Hanoi-based BIDV Securities Co., a unit of Bank for Investment & Development of Vietnam, said in an interview by phone.

Foreign-currency loans

Domestic deposits in foreign currency at banks rose 19.5 percent in the first quarter and foreign deposits held in dollars increased 15.1 percent, the central bank said today.

Foreign-currency loans increased about 13 percent in the first three months of the year, it said, without giving comparative numbers. "Foreign-currency liquidity at banks is ensured, but dollar lending rose at a level that is quite high," the monetary authority said.

"Even companies that don't need to import goods preferred dollar loans," BIDV Securities' Tuan said. "With these moves, dollar lending will be limited to those companies with real demand for foreign currency."

Prime Minister Dung has intensified the fight against inflation this year by ordering a "tight" monetary policy and lowering targets for credit growth. Consumer prices increased 13.89 percent in March from a year earlier, the fastest pace since February 2009.

The Vietnamese dong dropped to a record low against the dollar yesterday after the State Bank of Vietnam set the reference rate at the weakest level against the dollar since January 2005. The dong slid to 20,925 per dollar before closing little changed at 20,920, according to data from banks compiled by Bloomberg.

The State Bank of Vietnam set the currency's reference rate at 20,723 for April 11, compared with 20,718 yesterday, according to its website. The currency is allowed to trade up to 1 percent on either side of the rate.