HSBC: Vietnam’s inflation should decelerate

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According to the report, inflation may become a problem again Asia later this year, but in Vietnam , things are likely to be different.

After last year’s rapid rise, price pressures are now cooling amid slowing demand and falling credit growth, the bank said, adding that the State Bank of Vietnam has been able to cut rates by 1 per cent.

The bank commented that while easing policy rates in the midst of a rise in international oil prices may seem premature, the cut is unlikely to reverse the downward trend in Vietnam ’s inflation.

“We also do not expect the rising oil price to significantly have an impact on inflation in 2012, assuming that oil prices do not rise above $140 per barrel,” the bank said.

The sharper-than-expected deceleration in prices suggests that the filtering through of tightening policy (Resolution 11), the easing of demand after Tet and the base effect are all working together to keep price pressures low.

Despite the interest rate cut, inflation should continue to decelerate to single digits by year end.

The report pointed out that one of the notable improvements for VND has come though the narrowing of the trade balance.

The overall picture has been improving for some time, with a small trade surplus recorded in January, which was only the second monthly surplus in three years.

The previous VND depreciation has no doubt had something of an impact, but so too has the fact that Vietnam exports a lot of primary goods with stable underlying demand, such as rice and fish produce, which means it has suffered less from the global slowdown.

Meanwhile, FDI flows have remained relatively robust, especially from Japan . Indeed, February’s data shows more than $800 million in FDI from Japan to Vietnam . If similar flows continue then it will provide a useful source of foreign exchange to the country, the report said.