VINACHEM

Vietnam’s economic growth accelerated in the second quarter after the central bank cut interest rates to revive lending to businesses and rising foreign investment boosted the nation’s exports.

Gross domestic product grew 5 percent in the second quarter from a year earlier, according to the General Statistics Office in Hanoi. The central bank said on June 27 it would weaken its dong-dollar reference rate and that it would lower its rate caps on U.S. dollar and dong deposits effective June 28.

Vietnam’s central bank has cut its refinancing rate eight times since the beginning of 2012 to spur lending, and the government is setting up an asset management company to clear bad debt. The legislature last week voted to lower the corporate income tax rate to help businesses, while disbursed foreign investment rose 5.6 percent in the first half of 2013 to $5.7 billion, according to the Ministry of Planning & Investment.

“This isn’t going to be a strong growth year, but the economy is stabilizing,” said Gaurav Gupta, the Hanoi-based managing director at General Motors Co.’s Vietnam unit, citing lower interest rates and inflation than in previous years. “This year should set the base for the government to take actions to drive growth faster in the future.”

The dong has slipped about 0.4 percent this quarter, a smaller decline compared to other regional currencies including the Philippine peso and the Thai baht. The benchmark VN index has gained more than 16 percent this year.

Business index

The central bank weakened the dong-dollar reference rate to 21,036 from 20,828, which has remained unchanged since Dec. 26, 2011. The dong is allowed to trade as much as 1 percent on either side of the rate.

The adjustment is “to more accurately reflect the supply and demand of foreign currency in the market,” to create stability for the foreign-exchange market, and to improve the balance of payments, it said. The monetary authority said it will use all necessary measures to ensure currency stability.

For U.S. dollar accounts, the central bank cut the corporate deposit rate to 0.25 percent from 0.5 percent for all tenors and reduced individual deposit rates to 1.25 percent from 2 percent.

On dong deposits, the rate was cut to 1.2 percent from 2 percent for tenors of less than one month, and to 7 percent from 7.5 percent for tenors of one month to less than six months.

Dong support

“The cut in USD deposit rates is in line with the government’s anti-dollarization policy,” Eugenia Fabon Victorino, an economist at Australia & New Zealand Banking Group Ltd. (ANZ) in Singapore, said in an e-mailed note. The larger cut in dollar deposit rates for individuals in comparison to dong rates is expected to support the local currency, she said.

Vietnam’s economy expanded 4.9 percent in the first half from a year earlier, compared with a median estimate of 5 percent in a Bloomberg News survey of seven economists. GDP grew a revised 4.76 percent in the first quarter from a year earlier, and the International Monetary Fund predicts the economy is set for a third straight year of sub-6 percent growth for the first time since 1988.

The government targets 5.5 percent for this year after a 5.03 percent pace last year, the slowest since 1999. Vietnam’s GDP may rise 6 percent in 2014, according to a directive by Prime Minister Nguyen Tan Dung posted on the government website this week. It also urged implementing monetary policy with the aim of stabilizing the currency in order to “efficiently” supply capital in the economy.

Exports in the first half rose 16.1 percent to $62.05 billion from the same period a year earlier, while imports climbed 17.4 percent to $63.5 billion for a trade deficit of $1.4 billion, the Statistics Office said on June 27.

“Most of the growth is coming from the foreign-invested sector,” said Dominic Mellor, a Hanoi-based economist at the Asian Development Bank. “That’s how Vietnam has been able to sustain its exports (VEEXTYOY) and, to some degree, its growth.”

Credit for the five months through May 31 rose 2.98 percent, compared with a 0.56 percent increase in the same period a year earlier, according to the central bank. A business-climate index climbed in the second quarter from the first, according to the European Chamber of Commerce in Vietnam.

The central bank said on June 27 it will also lower the interest-rate cap on short-term dong loans to 9 percent from 10 percent for industries including agriculture and exports, and for small and medium-sized enterprises.

Low consumption

“Businesses and production still have a lot of difficulties because consumption in the market is still at low levels and companies’ ability to absorb bank loans is still limited,” it said. The rate-cap reductions are “in order to curb deposit and lending rates at reasonable levels to help stabilize the money market and the foreign-currency market and to continue implementing measures to help resolve difficulties for businesses and production.”

Industry and construction, which made up 38.7 percent of the economy in the first half of the year, grew 5.18 percent, latest data showed. Services, which accounted for 43.1 percent of GDP, grew 5.92 percent. Agriculture, fisheries and forestry, which made up 18.2 percent of GDP, expanded 2.07 percent.

“There are some signs that growth may be bottoming out,” said Deepak Mishra, the Hanoi-based lead economist in Vietnam for the World Bank. “But it’s premature to conclude whether this is the beginning of a sustained recovery.”