Vietnam inflation warning; dong under pressure

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Vietnam's inflation has reached a "warning level" and will rise sharply in coming months unless the authorities adopt strong measures, a local newspaper said on Monday, quoting a deputy planning minister.

High inflation could pile yet more pressure on the dong, which has been on a steady downward trajectory since early 2008 and was trading well beyond the lower limit of its central-bank-mandated band on Monday.

Reports from bankers and businessmen about the availability of dollars in the system were mixed, and most expected the dong to continue to drop.

Steps to check the rise in the consumer price index , including flexible monetary policy and measures to control the price of key commodities, were having little effect, Vice Minister of Planning and Investment Cao Viet Sinh said.

"The CPI trend is now at a warning level," the Vietnam Investment Review quoted him as saying. "Actually, it is signaling a further sharp rise in the months up to the Lunar New Year festival if we do not use strong measures."

The CPI rose 1.05 percent in October from the month before, after increasing 1.31 percent in September, according to the government statistics office. Annual inflation in October was 9.66 percent.

Minister of Industry and Trade Vu Huy Hoang said on Monday his ministry had revised down its forecast for the trade deficit this year to US$12 billion from $13.5 billion, but that may have little effect on the currency. A Reuters poll of economists in October forecast a $12.2 billion gap.

Tough situation

The dollar/dong bid rate fell 1.64 percent to 20,450 on Monday at a major gold shop in Hanoi from 20,120 a week earlier.

In previous times of weakness, the gap between official and unofficial dong exchange rates was around VND300-400 (1.5-1.6 US cents). This time the gap has widened to VND1,000, which pushed dollar prices in banks up, the director of a Hanoi-based computer equipment importer said.

"We are facing a tough situation buying dollars from banks, as they offer at rates that are just a bit lower than in the unofficial market," he said.

The dong is officially only allowed to trade in a band 3 percent either side of the daily reference rate, but gold shops often trade beyond the band and banks use fees, third currencies or other means to circumvent the band.

One currency trader at a foreign bank said dollar liquidity remained reasonable.

"It's all about the price," he said.

A foreign exchange manager at one of Hanoi's partly private lenders concurred, saying his bank was able to meet demand from favored state-owned companies as well as private ones.

But a third banker, a senior treasury official at a foreign institution in Vietnam, said he felt the market was facing a shortage of dollars due to the stubbornly wide trade deficit and dollar loans taken earlier in the year coming due.

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