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The Vietnam News

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Vietnam fin minister calls for rethink on bill sale

HANOI - Vietnam's central bank should rethink the timing of its compulsory debt issue to banks next month to avoid damaging financial markets, the country's finance minister said in a government statement.

The Ho Chi Minh Stock Exchange dropped 16 percent last week on panicky selling by local retail investors after the central bank ordered banks to buy a combined 20.3 trillion dong ($1.26 billion) in 364-day bills to be issued on March 17. The plan is the central bank's latest effort to tighten monetary conditions to put a brake on annual inflation, which jumped in February to more than 15 percent, the highest level in more than 12 years. The minister, Vu Van Ninh, said the central bank should also avoid other monetary tightening measures at the same time as the auction that might affect investor sentiment.

"It is necessary to consider forcing commercial banks to buy State Bank's bills at an appropriate time to avoid shock impact on the market," Ninh was quoted as telling a cabinet meeting on Thursday, referring to the central bank. His comments were carried in a statement posted late on Thursday on the government's Web site (www.chinhphu.vn). Earlier this month, the central bank said it will sell the bills to banks at a coupon rate of 7.8 percent. It said banks were obliged to take part in the auction, but unlike the usual practice, they cannot sell this particular short-term debt to the central bank via open market transactions. Ninh said Vietnam had not been prepared for a huge inflow of foreign investment, which totalled $21 billion last year, compared with an initial forecast of $12 billion.

Economists said the inflow had fuelled inflation. "There's been no mistake in policy making but there is weakness in making forecasts," he was quoted by the Communist Youth League-run Tuoi Tre (Youth) newspaper as saying at a briefing for local media on Thursday. Since the central bank started a series of tightening measures, money markets have been volatile. For the measures, click here [ID:nHAN245394] Overnight loans, used by banks to make sure they have sufficient funds to balance their books, jumped to a record 40 percent on the interbank market earlier this month.

Reflecting the finance minister's concerns, the Vietnam Banking Association said it had asked the central bank to issue the bill in phases rather than on a specific date in order to spread out the impact on market liquidity. The central bank has yet to comment on the proposals. On Wednesday it told banks to cap the dong deposit interest rates at 12 percent. "Now the money market has stabilised, but market monitoring showed some signs of unhealthy competition," Deputy Governor of the central bank, Nguyen Dong Tien, said in a letter sent to the banking association on Friday and obtained by Reuters.

Tien said some banks still offered one single rate of 12 percent for all term deposits from one week to less than one year or offered depositors cash and kinds of high value. He urged the association to talk with banks to cut interest rates on both deposits and lending. Hanoi-based Techcombank has cut the rate offered for dong savings of one to 12 months to 12 percent, from 14.2 percent. ($1=16,050 dong)

By Ho Binh Minh - Reuters - February 29, 2008.