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Home > Blogs > Ian Fraser > As Vietnam loses faith in the dong, Hanoi struggles to rein in inflation

As Vietnam loses faith in the dong, Hanoi struggles to rein in inflation

Vietnamese dong | As Vietnam loses faith in the dong, Hanoi struggles to rein in inflation Ian Fraser

The commodities price correction of early May has led some, including New York Times columnist Paul Krugman, to believe the spectre of inflation has been banished, at least for a while.

However I am not so sure. The Financial Times blogging site Beyond Brics has produced a handy chart showing how serious a problem inflation remains for emerging markets in Asia. The chart shows changes in headline inflation for a dozen Asian nations from 2009 to February 2011, plus the contribution made by food and energy prices to overall inflation.

Looking at the chart, the country with the biggest inflationary headache is Vietnam. Its inflation rate surged to 17.51% in April, and only the currencies of Ethiopia and Venezuela are losing value faster. And Vietnamese inflation is showing little sign of abating.

On May 9 Bloomberg reported that the Vietnamese dong weakened on speculation that inflation will accelerate. “We expect weakness in the dong to resurface as inflation edges higher in the coming months,” said Credit Suisse in a research note.

Beyond Brics suggested that Vietnamese policymakers are struggling to control inflation because the country has one of the highest weightings of food and fuel in its inflationary basket - and the prices of these commodities are outside its control. But writer Valentina Romei added that a generous fiscal package and loose monetary policy introduced by the Hanoi government during the crisis has also contributed. This triggered an expansion in bank credit that continues today.

Private credit has surpassed 120% of GDP, up from less than 40% in 2001, noted the The Economist. It added:

"By this measure Vietnam is the 'world record-holder for debt creation', according to Jonathan Anderson of UBS, although bank deposits have largely kept pace with the expansion of loans."

Beyond Brics said an 18% devaluation in the dong since early 2009 hasn’t helped matters, as it has made imports pricier.

The Economist reported that the Vietnamese government is pulling out all the stops in a bid to dampen down inflation. On May 4, central bank the State Bank of Vietnam raised a key interest rate to 14%. This followed a flurry of rate hikes since February 2011. The government also unleashed a barrage of commitments known as ‘Resolution 11’ intended to deleverage the economy, cut the deficit, tighten money supply and rein in state-owned enterprises.

The central bank is also fighting the creeping dollarization and even “goldization” of the Vietnam economy. Despite capital controls, holders of dong usually find it easy to switch into hard currency or soft metal. The Economist said:

"The country is home to a large stock of dollars, many of them remitted by migrant workers, and a sizeable stock of gold. Vietnam’s banks offer dollar deposits and in Ho Chi Minh City, DongA bank has even installed an ATM that dispenses gold bars."

The bank launched its 'Gold to Go' German-built, gold-plated, bullion-dispensing ATMs in both Ho Chi Minh City and Hanoi in October 2010.

However the government is unlikely to be a huge fan of the innovative devices. It sought to give greater support to the dong in April when it capped the interest rates offered on dollar deposits at 3%, compared with rates as high as 14% on dong accounts. It also clamped down on the grey-market in bullion. And, according the The Economist, DongA Bank has become more reticent about its gold ATMs.

Further reading on emerging market inflation:

Tags: Asia , Asia-Pacific , inflation , Vietnam
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