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Vietnam's government is looking at all the options to fight inflation, from allowing more exchange rate flexibility to raising interest rates and issuing more bonds to mop up liquidity, officials and economists
said.
A bank teller handles money as the government tries to handle inflation by soaking up liquidity
February’s 15.7 percent inflation rate was a “wake-up call” to the government after the economy overheated last year, but a policy document and government statements this week showed Hanoi was taking the problem seriously, analysts said.
“One of the challenges facing the government is to reassure investors about the direction of economic policies, especially given the hype surrounding Vietnam in recent years,” said Benedict Bingham, the International Monetary Fund representative in Vietnam.
To fight inflation, the State Bank of Vietnam (SBV), the central bank, has tightened monetary policy and at the end of last year it started to allow the dong to strengthen after pushing the currency down gradually against the dollar for years.
In an attempt to calm the stock market, the government’s investment arm has started buying shares after retail investors baled out following the central bank moves to soak up liquidity.
One Western banker described both the liquidity squeeze and the stock market correction as healthy.
But he added: “I don’t think the inflation issue will go away soon, however, and the SBV has rightly recognized through recent steps that the currency is going to have to take more of the strain in the short term.”
Vietnam’s measures to curb inflation, which has quickened to a 12-year high, may be “crude” but will help the country in the long term, the Asian Development Bank’s country director said Friday.
“They don’t have sophisticated tools, so what was done was a bit crude, and the market has certainly reacted sharply,” said Ayumi Konishi, ADB’s country director for Vietnam, in a lecture at Singapore’s Institute of Southeast Asian Studies.
He was referring to the Ho Chi Minh Stock Exchange index, which has tumbled 30 percent this year as authorities tightened monetary conditions.
Konishi said short-term volatility in Vietnam’s financial markets was necessary for “consolidation,” so the Southeast Asian country can address key issues such as inflation and its widening current account deficit.
This will build investor confidence for its medium- to long-term growth prospects, he said.
In the short run, the market will continue to be driven by sentiment, Konishi said.
Strong potential
Despite inflation running at the highest levels in 12 years and a tripling of the trade deficit in the first two months of 2008, economists say they still believe in the potential of Vietnam’s economy, which is growing at 8 percent a year and attracting record levels of foreign investment.
The Southeast Asian country embarked on “economic renewal” in 1986.
Last year, after a massive effort to change its laws on business and trade, it was admitted to the World Trade Organization.
Standard & Poor’s credit analysts said in a note that “heat generated by blistering economic growth may soon become too uncomfortable.” But it said it did not expect high inflation to result in a sovereign credit rating downgrade in the next one or two years unless inflation accelerates further.
In statements on the government website (www.chinhphu.vn) Deputy Prime Minister Nguyen Sinh Hung said the central bank should not maintain the present dong deposit interest rate cap of 12 percent imposed in late February, adding this “needs to be reduced gradually in pace with the market conditions.”
Last month the central bank raised banks’ compulsory reserves.
It also raised three main interest rates, last changed in December 2005.
Economists say Vietnam may need to consider using an array of monetary policy instruments and more sophisticated adjustments.
“It is not easy to explain the preference for quantity- over price-based measures like interest rates,” said Jonathan Pincus, senior economist at the United Nations Development Program in Hanoi.
“Part of the reason may be a concern that higher interest rates would not slow credit growth fast enough, or that they would have to rise very high to have much effect.”
