Vietnam inflation climbs to a 22-month high

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Vietnam's inflation rate accelerated to the highest level in 22 months after currency devaluations stoked import costs and credit expansion spurred domestic demand.

Prices increased 11.75 percent in December from a year earlier, compared with 11.09 percent in November, according to figures released Friday by the General Statistics Office in Hanoi. The reading is the highest since February 2009. Prices rose 1.98 percent from November, the fastest monthly pace since June 2008.

The government is struggling to restrain inflationary pressures stoked by economic expansion, higher food costs and a weaker currency. Moody's Investors Service said officials have been unwilling to tighten monetary policy effectively when it cut Vietnam's debt rating on Dec. 15, and Standard & Poor's cited "sensitive" domestic sentiment on inflation in lowering its rating on Dec. 23.

"Inflation is showing no signs of slowing down," said Sherman Chan, a Hong Kong-based economist at HSBC Holdings Plc. "The extent of the jump in the year-on-year figure isn't as bad as we saw last month, but it's still pretty concerning."

Overall food prices jumped 16.18 percent from a year earlier, with the pace of increase in the sub-category including rice reaching 17.96 percent, according to Friday's figures. Vietnam is the world's fifth-biggest rice consumer.

"If you look at food prices, there's an upside risk," said Chan of HSBC. "Rice prices are set to rise further."

Credit ratings

Moody's lowered Vietnam's long-term foreign-currency rating to B1 from Ba3, with a negative outlook, citing balance-of- payments and reserves risks as inflation quickens and the nation's currency weakens. Standard & Poor's cut its long-term foreign-currency rating to BB- from BB, with a negative outlook, citing a greater susceptibility of the banking system to a financial or economic shock.

"To get more stable prices, they are going to have to slow growth down," Ari Kokko, a professor at Copenhagen Business School's Center for International Business and Emerging Markets, said by telephone on Dec. 21 after visiting Vietnam last month. "Inflation in Vietnam is closely related to domestic policies and in particular to credit expansion."

The government has devalued the dong three times since November last year. The currency's depreciation is playing a "significant role" in the acceleration of inflation, according to the International Monetary Fund.

Black market

The currency's official exchange rate was 19,498 per dollar as of 11:14 a.m. in Hanoi, compared with 19,099 before the most recent devaluation in August. On the so-called black market, the dong traded today as weak as 21,110 as of 2:20 p.m. in Ho Chi Minh City, according to a telephone information service run by the state-owned Vietnam Posts & Telecommunications Group.

The central bank raised interest rates on Nov. 5 for the first time in almost a year, a day after the government said curbing inflation was a greater priority than boosting growth.

Vietnam should aim for inflation of 3 percent to 4 percent, in line with other countries in the Association of Southeast Asian Nations, the IMF said this month.

The government forecasts economic growth of approximately 6.7 percent this year. The pace of expansion may accelerate to 7 percent in 2011, Minister of Planning & Investment Vo Hong Phuc said on Dec. 8.

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