Vietnam pro-growth policies pose inflation risk, Citigroup says

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The Vietnamese government's focus on boosting growth poses risks to the outlook for controlling the pace of price increases in the Southeast Asian country, Citigroup Inc. said.

Vietnam's gross domestic product expanded 6.4 percent in the second quarter, up from a 5.83 percent pace in the first quarter, according to figures released last week by the General Statistics Office in Hanoi. For the first half, the economy grew 6.16 percent, accelerating from a 3.87 percent rate of expansion in the first six months of 2009.

The "solid" figures showed "very strong momentum," wrote Johanna Chua, head of Asian economic research at Citigroup in Hong Kong. Recent Vietnamese central bank circulars calling for lower interest rates underline the risk of "premature easing" by policymakers, Chua wrote, in a note dated Monday.

"Pro-growth policies could outweigh the needs for managing inflation and external imbalances amid a rigid foreign exchange regime and a relatively low level of foreign exchange reserves," wrote Chua.

Vietnam's inflation rate in June was 8.69 percent, the third month the figure has eased since reaching 9.46 percent in March.

The first-half growth figures pointed to strong domestic demand and a resilient tourism industry, Citigroup said. Retail sales and industrial production figures also underpin an economic growth picture that appears stronger than other countries in Asia, Chua wrote.

"˜Bullish' 2011 target

Citigroup also pointed to a "bullish" growth target of 7 percent to 7.5 percent in 2011 cited by Prime Minister Nguyen Tan Dung as well as recent comments by other government officials that this year's expansion may outpace a 6.5 percent goal as illustrating a focus on boosting the pace of economic expansion.

"Moreover, a widening trade deficit in June showed fragile confidence in the Vietnamese dong," wrote Chua.

The trade shortfall widened to US$1.2 billion in June from a revised $871 million in May, according to figures released on June 25 by the Statistics Office. The Vietnamese dong is now trading at 19,095 per dollar, compared with about 18,980 before the trade figures were released.

China's announcement last month that it would end a policy of linking its currency to the US dollar may ease pressure on Vietnam's government to further weaken the dong, by boosting the competitiveness of Vietnamese exports, Australia & New Zealand Banking Group Ltd. wrote on July 1.

"Dong fundamentals have improved," wrote Tamara Henderson, head of Asian foreign exchange research for ANZ. Even so, "a move to 20,000 in dollar-dong still cannot be ruled out," she wrote.

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