Double digit inflation to flag belt tightening

The local currency is to continue facing big pressures as a range of factors conspire against it

Vietnam’s consumer price index (CPI) accelerated from 9.7 per cent on-year in October to 11.1 per cent on-year in November. That means the index rose by 2.6 per cent month-on-month, against 1.6 per cent in October. For 2010, the government set a target of single-digit inflation.

“We expect price pressures to continue rising into 2011 and seasonally the first quarter tends to be a high inflation period given the Lunar New Year holiday period in early February,” Barclays Capital’s Prakriti Sofat wrote in a report.

Dominic Scriven, chief executive officer at Dragon Capital Group  - which manages a $1.5 billion investment fund in Vietnam, said: “Inflation is a really  big problem for Vietnam at present. Inflation is like a liver in our body. When we have liver disease our body does  not operate normally.”

HSBC’s ASEAN economist Sherman Chan said that on the inflation front, amid further upside risks to food prices especially due to unfavourable weather conditions in recent months across the region, inflationary pressures looked set to intensify.

“As such, we may not have seen the peak yet. Meanwhile, the monthly trade deficit also continued to widen. Thus, we expect another 1 per cent base rate hike in December to help arrest the recent economic trend,” said Chan.

The monthly trade deficit widened from $1.1 billion in October to $1.3 billion in November. Against the same period of 2010, exports surged by 37.5 per cent while imports rose by 13.7 per cent.

“The direction at which Vietnam’s two key economic indicators are moving will put the Vietnam dong under further downward pressures,” Chan added.

The government in recent weeks has appeared keen on tackling the surge in inflation and preventing the dong from further depreciation. Not only have policymakers stated that no currency devaluation is on the agenda before the Lunar New Year in February, 2011, the authorities have also changed its monetary policy stance.

On November 5, the State Bank, for the first time in 12 months, lifted the base rate from 8 to 9 per cent. Discount rate and refinance rate were also hiked by 1 per cent to 7 and 9 per cent respectively.

On the other hand, commercial banks are no longer asked to cut rates, but have instead been raising rates following the central bank’s base rate hike.

Nguyen Thanh Toai, deputy general director at Asia Commercial Bank (ACB), said there was always a “time lag” for a monetary move taking effect.

However, Chan the last rate hike seemed insufficient in arresting the current economic trend in Vietnam and further monetary tightening was necessary.

“Vietnam’s two most-watched economic indicators, inflation and trade balance, are yet to show improvement. Further monetary tightening is likely, and the next rate hike is expected to come by the year’s end,” Chan said.

Scriven said high inflation would have a negative impact on Vietnam’s economic development in 2011.

The business community already faces 19 per cent annual lending interest rates from 15-17 per cent previously as the result of State Bank’s tightened monetary policy.

Sofat predicts the central bank would hike the base rate by another 100 basis points in the first quarter of 2011.

“With high lending interest rates, enterprises will not be able to access bank loans, while they are also suffering skyrocketing input material prices,” said Cao Sy Kiem, chairman of Vietnam Association of Small and Medium Enterprises.

Kiem, also a member of the Consulting Committee for National Monetary Policy, said the situation seemed to be similar to 2007-2008 when inflation reached double digits.

ACB president Tran Xuan Gia said the main reasons for high inflation were objective factors.

“High inflation will continue threatening Vietnam till the government resolves all the weaknesses of the economy. Those are unreasonable manufacturing structure and ineffective investments,” said Gia.

Though dometic industrial production has been developing rapidly over the past years, Vietnam still has to import most input materials and equipment for domestic manufacturing, causing a widening trade deficit.

Meanwhile, the effectiveness of investments has not yet been improved with the incremental capital output ratio was 8 last year.