Vietnam's new inflation target may still be out of reach

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Vietnam's new inflation target might be overly ambitious thanks to a highly inflationary first four months and a continuing pickup in economic activity.

The government raised this year's inflation goal to 8 percent early this month from the previous 7 percent as strengthening economic growth has pushed up prices.

Vu Dinh Anh, deputy head of the Ministry of Finance's Institute for Market and Pricing, said the country would only reach its target if consumer prices were kept below 3 percent for the rest of the year because inflation had been high in the first four months.

"It will be very difficult, he said.

While they work to curb inflation, the government must also strive to ensure that the country meets its 2010 economic growth target of 6.5 percent.

Consumer prices increased 4.27 percent in April compared to last December, according to the General Statistics Office in Hanoi.

Anh said his agency was analyzing price movements this month as minimum wages had just been increased, and animal diseases among cattle and poultry had broken out. The prices of food and grain have not yet shown signs of sharp increases this month, and general consumption is low, as it often is in the summer, he said.

Economist Le Dang Doanh said consumer prices depend on monetary and credit policy, and the control of the trade deficit. Vietnam imports materials and equipment for production of exports, but the added value of the export products is still low.

It is difficult for an import-dependent country like Vietnam to control the impacts of higher prices of input materials, especially at a time like now when the global economy is recovering.

In addition, the reduction of inflation will be more difficult if the country implements policies to facilitate big investment to serve economic growth, Doanh said.

Vietnam's economy may expand 7.2 percent this year, the fastest pace since 2007, and more than the government's target, according to HSBC Holdings Plc.

Ayumi Konishi, Asian Development Bank Country Director for Vietnam, said the country should not "rush ahead and should focus instead on economic stability and efficiency. "Without enhancing the efficiency of the country's economic systems, attempts to achieve a higher economic growth rate will inevitably invite the return of high inflation, and people's concern over inflation will result in pressure on the Vietnamese dong.

ADB forecasts that inflation in 2010 would accelerate to an average of about 10 percent on account of last year's rapid growth of money supply, dong devaluations, and a projected pickup in economic activity and world commodity prices in 2010.

Tai Hui, head of the Standard Chartered Bank's Southeast Asia research division based in Singapore, said in a report that the risk of inflation in Vietnam was rising.

The minimum wage for state employees was raised by 12.3 percent on May 1. Two one-off devaluations of the Vietnamese dong in the past six months have also put upward pressure on import prices.

"We expect further devaluations in the coming months, said Tai Hui. "We revise up our 2010 inflation forecast to 11.5 percent from 8.9 percent.

Faster inflation will pressure the State Bank of Vietnam to raise interest rates further, even though the government has expressed a cautious view on monetary tightening.

"We maintain our view that the central bank will raise the base rate further in the coming quarters, but we now expect the benchmark interest rate to end the year at 12 percent, instead of our previous forecast of 10 percent, Tai Hui said.

Need to increase added value

Vietnam aims to limit its trade deficit to no more than 20 percent of exports, the State Bank said on May 5. The gap was $4.65 billion in the first four months of the year, equivalent to 23 percent of overseas sales, and in April it widened 8 percent from the previous month to $1.25 billion, as an expanding economy drove an increase in imports.

Doanh said the added value of exports which use imported materials was still low, raising pressures on inflation affected by global prices. He said the country has to import materials worth up to $860 million to produce garment and textile exports valued at $1 billion.

Meanwhile, Singapore imports most materials for domestic production, but its price index is still low, as it produces high-valued electronic and biological products for shipments, he said. Thus, the impact of world prices on Singapore's inflation seems to have been annulled.

To effectively control prices, Vietnam should strengthen domestic production of materials, Doanh said. "To this end, it will take us 3-10 years. However, we will never reach our goal if we do not start.

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