Inflation pressures bigger than trade deficit

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Rising inflation will pose more of a challenge to Vietnamese authorities this year than the sizeable, but manageable, trade deficit, a Standard Chartered Bank official says.

Tai Hui, head of the bank's Southeast Asia research division based in Singapore, says in a report the risk of inflation is rising.

The minimum wage for state employees will be raised by 12.3 percent on May 1. Two one-off devaluations of the Vietnamese dong (VND) in the past six months have also put upward pressure on import prices, and "we expect further devaluations in the coming months.

"We revise up our 2010 inflation forecast to 11.5 percent from 8.9 percent," Tai Hui said.

Faster inflation will pressurize the State Bank of Vietnam to raise interest rates further, even though the government has expressed a cautious view on monetary tightening.

"We maintain our view that the central bank will raise the base rate further in the coming quarters, but we now expect the benchmark interest rate to end the year at 12 percent, instead of our previous forecast of 10 percent."

Meanwhile, the trade deficit reached $3.5 billion in the first quarter, broadly in line with the bank's full-year forecast of $12-15 billion. Disbursed foreign direct investment grew by 13.6 percent year-on-year in the first quarter to $2.5 billion.

Remittance inflows into Ho Chi Minh City grew by 18 percent year-on-year in the first quarter, indicating that the worst has passed for two key pillars of Vietnam's capital inflows.

Stabilization of the trade deficit and the improvement in capital inflows should provide support for the dong. Another positive sign is that the spread between the officially traded exchange rate and the "˜parallel market rate' has narrowed since the February devaluation, the report said.

"Even so, we continue to expect further dong devaluation, driven by the government's pro-growth bias and the risk that firm domestic demand may widen the trade deficit."

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