Vietnam inflation rate eases as economy struggles to revive

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Vietnam's inflation eased in February as domestic consumption struggled to rebound after a credit crunch that slowed economic growth to a 13-year low.

Consumer prices climbed 7.02 percent from a year earlier after rising 7.07 percent in January, the General Statistics Office in Hanoi said today.

"We expect more of this benign inflation trajectory," said Edwin Gutierrez, a London-based portfolio manager at Aberdeen Asset Management, which holds Vietnamese bonds. "The economy is still fairly weak, which is the necessary byproduct of the credit slowdown."

Moderating economic expansion has kept Vietnam's inflation rate below the double-digit range it held at throughout 2011 and into early 2012. Concern over the level of bad debts at the nation's banks has eased credit growth, damping consumer demand and squeezing companies' ability to raise capital and spur expansion.

"Domestic demand still appears to be weak and the exchange rate has been stable for a while, so I don't see many core inflationary pressures there," Dominic Mellor, a Hanoi-based economist at the Asian Development Bank, said before the data release. "There's still a lack of economic confidence due to people waiting to see what will happen with the banking sector."

The World Bank in December forecast that Vietnam's economy will expand 5.5 percent this year, which would mark a third straight year of below-6-percent growth. The increase in gross domestic product averaged 7.3 percent annually in the first decade of this century.

Credit growth

Vietnam's dong closed at 20,885 per dollar yesterday, compared with 20,898 the previous day. The Ho Chi Minh City Stock Exchange's VN Index rose 0.2 percent to 477.69, bringing the gain for this year to about 15 percent.

The State Bank of Vietnam said in December it is targeting 12 percent credit growth this year, up from about 7 percent in 2012. It cut interest rates six times last year, with the latest reduction taking effect Dec. 24, two weeks after the World Bank said Vietnam is susceptible to a premature loosening of monetary policy that may lead to a resurgence in inflation.

Consumer prices gained 1.32 percent in February from the previous month, the Statistics Office said today.

Health-care costs

While prices in the category including health care and pharmaceuticals jumped 56.04 percent from a year earlier, the monthly rate was 0.58 percent, compared with 7.4 percent in January. Some provinces that didn't adjust their health-care costs in 2012 did so in January, fund manager Dragon Capital said in its latest monthly update.

"The pickup in inflation you saw before was largely health-care related," said Gutierrez of Aberdeen Asset Management. "The fact that the government is letting health- care prices rise shows that they're comfortable with the inflation picture."

If consumer-price gains are on track to meet a year-end target of 6 percent, the central bank will consider lowering rates, central bank Governor Nguyen Van Binh said in the transcript of an interview posted on the government website this week.

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