News Room - Business/Economics

Posted on 27 Dec 2007

Vietnam’s inflation highest in 12 years

Vietnam's inflation accelerated to the fastest since 1995, adding to pressure on the government to let the dong strengthen and make imported goods cheaper. Consumer prices increased 12.6% in December compared with the same month last year, the General Statistical Office said in Hanoi. Prices rose 2.9% from November.

The Southeast Asian nation's strengthening economic growth, spurred by joining the World Trade Organisation this year, has drawn direct investment from abroad and foreign buying of Vietnamese stocks and bonds. The government yesterday widened the currency's trading band, a move that may rein in inflation.

“Inflation is much more rapid in Vietnam than even in China, which most people think is overheating,'' said Jonathan Pincus, Vietnam country economist at the United Nations Development Programme office in Hanoi. “The real culprit has to be the massive inflows of foreign exchange, which are bumping up the money supply.''

Vietnam's inflation only trails that of Kazakhstan and Sri Lanka as the fastest of 17 countries in Asia tracked by Bloomberg. China's consumer prices rose 6.9% in November.

Leading the year-on-year gains, the quickest since 1995, food and foodstuffs rose 18.9% and construction materials surged 17.1%, today's report showed. Vietnam is importing more building materials needed for a real-estate boom that's fuelling the economic expansion.

The inflows of foreign capital are challenging the government's policy of devaluing the currency to keep exports cheap against Vietnam's competitors. The central bank hasn't allowed the dong to gain since 1995. The State Bank of Vietnam yesterday expanded the daily trading band for the dong to 0.75% after the government asked authorities to take steps to slow inflation. Vietnam controls the exchange rate by allowing the currency to trade a fixed amount on either side of a level it sets each day.

“In order to constrain inflation, we are considering a number of measures including changing interest rates, the reserve requirement for banks, and the dong exchange rate,'' central bank Governor Nguyen Van Giau said in a telephone interview today from Hanoi. He declined to give further details.

The government aims to keep inflation below the economic growth rate, which accelerated to 8.2% through the end of September from a year earlier, the fastest in a decade. The GSO may release 2007 figures this week. The government expects economic growth to quicken to more than 9% next year.

“They want to grow as close as they can to 10% and they want single-digit inflation,'' the UNDP's Pincus said. “The problem at the moment is that they are favouring growth over price stability.''

Vietnam's currency is poised for a yearly gain after the trading range widened. The dong was little changed at 16,035 against the dollar as of 4:45 p.m. in Hanoi, after earlier strengthening to a nine-month high of 16,025.

“We encourage the government to introduce greater exchange-rate flexibility to allow smoother in-and-out capital flows,'' said Ayumi Konishi, the Asian Development Bank's Hanoi-based country director for Vietnam. “The managed depreciation of the dong is in fact one of the causes of current inflation with the depreciation of the US dollar.''

The country's credit growth is estimated at 35% this year, according to the ADB. The dong gained to as much as 15,977 against the dollar on February 13, the most since at least 1993, and the benchmark VN Index of stocks reached a record high March 12. The index is set for a fourth yearly gain, rising 22%.

Vietnam's foreign investment jumped 69% this year to US$20.3 billion, Thoi Bao Kinh Te Vietnam reported yesterday, citing the Ministry of Planning and Investment.