VINACHEM

HA NOI — An economist with Barclays Capital disagrees with Fitch's recent decision to give Viet Nam a BB- rating and place the country's economy on a negative watch.

Viet Nam was moving in the right direction, wrote Prakriti Sofat, the Barclays economist responsible for Indonesia, the Philippines and Viet Nam, in her quarterly report on emerging markets published yesterday.

Strong growth fundamentals, a smaller trade deficit, and strong foreign investment disbursements should allay investor concerns, Sofat wrote.

The nation's central bank has deregulated lending rates, which should result in higher bond yields, she said, predicting a modest tightening in domestic currency liquidity.

Consistent with seasonal patterns, dong liquidity improved after the Tet (Lunar New Year) holiday, but the voluntary cap on deposit interest rates of 10.5 per cent continued to put a constraint on the ability to raise capital.

In order to ensure the liquidity of the commercial banking system, Sofat suggested that the State Bank of Viet Nam move towards a more market-based system, with supply and demand determining the costs of capital, rather than interest rate caps.

"As banks' net interest margins improve; we believe the State Bank should do away with the deposit interest cap," she said.

Barclays itself remained slightly overweight in Vietnamese bonds, Sofat noted, after Viet Nam tapped the dollar market with a US$1 billion issue earlier in the year.

"We expect Government bond yields to rise further in line with rising inflation, tighter policies and gradually shrinking liquidity," said Sofat.

The 3.3-per-cent devaluation in the dong announced by the State Bank of Viet Nam in early February helped balance on-shore forex supply and demand and brought black market exchange rates fairly close to official rates. The closure of the bulk of gold trading floors before Marh 30also helped stabiise the situation.

"However, we continue to believe that the central bank needs to play a more active role in the currency market and in managing currency expectations," said Sofat.

Sofat forecasted economic growth of nearly 7 per cent in 2010, in line with Government targets and well above last year's 5.3 per cent growth. She estimated inflation would average 9.7 per cent in 2010, outpacing the official target of inflation below 7 per cent.

The Government was planning to institute price controls on some commodities, she noted, including rice, fertiliser, petrol, cement and steel, to prevent inflation from accelerating. — VNS