Vietnam’s growth slowed in the first quarter after the central bank raised key interest rates to among the highest levels in Southeast Asia to tame inflation.

 

Gross domestic product climbed 5.43 percent in the three months through March from a year earlier, according to a preliminary estimate released by the General Statistics Office in Hanoi on Tuesday, compared with 7.34 percent in the fourth quarter.

 

Prime Minister Nguyen Tan Dung has lowered the target for credit growth and ordered a tighter monetary policy. Price gains, a widening trade deficit, currency weakness and the near-bankruptcy of the nation’s largest shipbuilder have contributed to a slide in the stock market this year.

 

“The slowdown is happening quite sharply, and while inflation is accelerating,” said Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole CIB. “Good news for Vietnam will only come with weaker consumer price inflation.”

 

The benchmark VN-Index on the Ho Chi Minh City Stock Exchange has declined about 5.7 percent this year, compared with a 3.7 percent fall in the MSCI Asia Pacific Index.

 

The yield on the benchmark five-year bond rose five basis points to 11.92 percent on Monday, the biggest jump since March 7, according to a daily fixing price from banks compiled by Bloomberg. A basis point is 0.01 percentage point.

 

Quickening inflation

 

Consumer prices increased 13.89 percent in March from a year earlier, stoked by costlier fuel and electricity and higher import costs caused by devaluations of the dong. Kowalczyk expects inflation to peak at 14.5 percent in the second quarter.

 

The State Bank of Vietnam raised borrowing costs on March 8, increasing its refinancing and discount rates to 12 percent each. That matched the level of the repurchase rate, which has been raised six times from 7 percent in early November.

 

Thailand, the Philippines, India and South Korea also boosted rates in March to damp inflationary pressure, while China and Malaysia told lenders to set more cash aside in reserve. Indonesia paused after raising its benchmark to 6.75 percent last month, the next highest policy rate behind Vietnam’s among major Southeast Asian economies.

 

The central bank devalued the dong for the fourth time in 15 months on February 11 as it strives to narrow the nation’s trade deficit, which widened to US$1.15 billion this month from a revised $1.11 billion in February. That contrasts with the rise in most Asian currencies against the dollar in the past year.

 

Ratings cut

 

Officials have urged less use of gold and dollars in a bid to stabilize the currency as they try to steady the economy.

 

The government has “recognized that their attention and focus should be on addressing instability even if this comes at the expense of slower growth,” the World Bank said in a report last week. Such policies, if successful, will help Vietnam “regain its pre-crisis growth potential in the medium term,” it said, predicting 6.3 percent expansion in 2011.

 

Dung said last month he aims to curb credit growth to less than 20 percent this year from an earlier target of 23 percent. He also intends to narrow the budget deficit to less than 5 percent of GDP from a goal of about 6 percent in 2010, and cap the jump in money supply at 15 percent to 16 percent this year.

 

Industry and construction, which accounted for 43 percent of the economy in the first quarter, grew 5.47 percent during the period from a year earlier, according to Tuesday’s report. Services, which made up 42 percent of GDP, expanded 6.28 percent. Agriculture, forestry and fisheries, which accounted for the remaining 15 percent of the economy, grew 2.05 percent.

 

Economic potential

 

While accelerating inflation and the impact of Japan’s worst earthquake threaten slower growth across Asia, some businesses are judging Vietnam’s potential outweighs challenges.

 

Companies from Nokia Oyj , the world’s biggest maker of mobile phones, to Wintek Corp., a manufacturer of panels for Apple Inc.’s iPhones, are shifting production to the nation to benefit from cheaper labor compared with China.

 

Taiwan-based Wintek said last week it intends to invest as much as $150 million in a new plant in Bac Giang Province. Finland-based Nokia plans to open a plant near Hanoi to make low-end phones.

 

Overseas shipments climbed 25.5 percent last year to $71.63 billion, equivalent to about 75 percent of an economy that expanded 6.8 percent last year, the highest pace since 2007.