UPDATE 2-Vietnam economy may grow faster than expected in 2010

Wed Sep 1, 2010 5:37am EDT

* 2010 GDP to grow 6.7 pct -govt

* 2011 growth targeted at 7.5 pct

* Rises in global prices risk to inflation

* Short-term interest rates to drop (Recasts with report on inflation, detail)

By Ho Binh Minh

HANOI, Sept 1 (Reuters) - Vietnam's economy will expand faster than initially expected this year as the global recovery takes hold, which could add also to inflationary pressures later in the year, the government said.

In a statement released after a monthly cabinet meeting it said it now expected the economy to grow 6.7 percent in 2010, above its earlier growth target of 6.5 percent.

Gross domestic product growth would accelerate to 7.18 percent in the third quarter from a year ago, after 6.4 percent in the second quarter, "as domestic production has gathered growth momentum", said the report, released late on Tuesday.

It added that possible rises in global prices could add to inflation in Vietnam, though the Ministry of Planning and Investment said in a separate report "market prices were basically stable and inflation has been contained" so far.

The latest forecasts come within weeks of the country's fifth currency devaluation in two years and a ratings downgrade by Fitch on concerns over inconsistent policies, a rising current account deficit and hefty foreign borrowing requirements.

The benchmark stock index, the Vietnam Index .VNI, is down about 17 percent since its 2010 high of 551.40 on May 6, in part reflecting concerns about the macroeconomy. This week it has rebounded off 13-month lows hit last week.

The cabinet report also set a growth target of 7.5 percent for 2011.

Authorities have succeeded in capping inflation so far this year, and a media report on Wednesday quoted Nguyen Tien Thoa, head of the Finance Ministry-run Price Management Department, as saying full-year inflation could be as low as 7 percent.

The government target of 8 percent inflation for the year has not changed, and the government and planning ministry said the outlook was largely dependant on external factors.

"The economy is still facing challenges. Prices in the world market tend to increase and this will create pressures on price levels in the domestic market, especially in the later months of the year," the cabinet report said.

Another potential drag on growth was the difficulties businesses are having getting loans, both the planning ministry and government reports said.

"Enterprises in the production and business sectors still face difficulties in raising funds due to the relatively high rates at banks", the government report said. The planning ministry report had the same comment.

Authorities have been urging banks to bring interest rates down, with the the central bank no longer able to directly influence banks' lending rates via the base rate.

The central bank has also been been pumping money into the system via open market operations and has pledged to provide more funds to help bring lending rates down. State Bank of Vietnam Governor Nguyen Van Giau was quoted on Wednesday as saying he expected short-term lending rates to come down. [ID:nHAN107636]

The National Assembly, the parliament, had initially targeted economic growth this year at 6.5 percent, rising from 6.32 percent achieved in 2009.

The government has projected average annual economic expansion of between 7.5 percent and 8.5 percent over the five years from 2011, state media reported in July. [ID:nSGE66C02K] (Additional reporting by Ngo Thi Ngoc Chau and John Ruwitch; Editing by Kazunori Takada)