The central bank will cut interest rates further to help companies lower costs and cope with a drop in demand as the global recession deepens, Minister of Finance Vu Van Ninh has said.

The government is introducing a US$6 billion stimulus package to try to stop gross domestic product from falling further from the lowest rate since 1999 last year. The State Bank of Viet Nam has slashed the benchmark interest rate to 8.5 percent from 14 percent in the past three months.

“We have already reduced interest rates, and we will try to lower them further,” Ninh said in a speech on January 16 in Hanoi. “The government has made it a goal to prevent an economic recession.”

Vietnam’s benchmark five-year bond is heading for the biggest weekly gain in two months on speculation the State Bank of Vietnam will cut interest rates before the Lunar New Year holidays from January 26-29.

The yield on the five-year note fell three-quarters of a percentage point this week to 8.81 percent, the biggest drop since the five days ended November 14.

The dong traded near a record low of VND17,449.5 against the dollar. The government has let the currency depreciate 2.7% from a month ago.

“The government will take more measures to support companies,” Ninh said. “We don’t plan to devalue the dong but we will manage it flexibly and in a way that can help production and exports.”

The government is targeting economic growth this year of 6.5%. Expansion slowed to 6.2% in 2008, from 8.5% in 2007.

“We want to help companies increase their production and sales domestically,” Ninh said. “We will also encourage companies to find new markets internationally as exports are falling.”

Tightening forex control

The State Bank of Vietnam has asked commercial banks to limit the flow of foreign currency out of the country, especially US dollars, to help the government finance imports.

The country should prepare for a possible shortage of foreign exchange this year as inflows would slow down due to the global economic downturn, the central bank’s Deputy Governor Nguyen Van Binh said Thursday.

Vietnam has forex reserves of more than $20 billion, he said.

Last year, inflows included $10.5 billion in disbursed foreign investment and $8 billion in remittances, he said.

But these would not increase this year and could even decline, he warned.

Commercial banks should, therefore, tighten foreign currency loans, directing them mainly to exporters and importers of essential goods and projects that create jobs, he said, noting it would help curb the trade deficit.

The trade gap reached a record $17.5 billion last year and is expected to rise to $19.2 billion this year, according to the Ministry of Industry and Trade.

Binh also asked banks in HCMC, the country’s banking and financial hub, to consider lowering interest rates on dollar deposits. (TN)