Following the government's tightening of prices for essential industrial and consumer products, inflation is expected to remain stable in the coming months, an expert at Standard Chartered say.
"Inflation in the immediate future should remain under control, especially if global food and energy prices do not surge significantly," Tai Hui, Southeast Asia Regional Head of Research under Standard Chartered Bank, said in a statement. "However, we do not believe price controls will be effective in the event of a sustained surge in input prices."
Vietnam's latest economic data for August shows a continuation of the trend during the first half of 2010. Inflation is expected to remain relatively calm at 8.2 percent year-to-year, or 0.2 percent from month-to-month.
Meanwhile, the trade balance is expected to maintain an even keel. "We expect Vietnam's trade deficit to persist in the medium term, further devaluation of the dong is on the cards for 2010 and 2011," Tai Hui said.
On August 18, the State Bank of Vietnam devalued the dong by revising the US dollar-dong reference from 18,932 from 18,544. The bank maintained the daily trading band of 3 percent on either side of that rate.
The trade deficit has hung around $1 billion per month for much of 2010, he said. He attributes the even keel to strong export growth and cooling import growth.
Meanwhile, disbursed foreign direct investment, aids and remittance flows have been recovering steadily. Hence, the overall depreciation pressure on the dong ought to be lower than in previous years when inflows were waning on the back of the 2008 global financial crisis, Tai Hui said. Firm domestic demand is absorbing imports, he added.
Given the Vietnamese authorities' growth bias, Hui believes that further devaluations are likely in order to support exporters. "The timing of further moves will be politically driven," he said. "But we believe that a rise in commodity prices, which will in turn drive inflation and the trade deficit higher, could be a trigger."
Sharp rises in gold prices and the dollar could also prompt dong depreciation to intensify. "In line with these predictions, we have adjusted our dollar-dong forecasts without altering our overall profile," he said. "We now predict that the dollar-dong ratio will hit 19,500 at end of the third quarter; and 19,900 at the end of the fourth quarter."
Another important implication of the dong devaluation is that the authorities will not be able to push interest rates lower, despite stable inflation. The government has, for some months, been trying to persuade commercial banks to reduce lending rates in order to promote lending and facilitate growth, Tai Hui said.