Weaker dong enhances inflation threat: experts

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Relatively low incremental increases in prices over the last few months have lulled consumers and others into a sense of false security, experts say, warning that inflation continues to be a serious threat in the coming months.

The recent devaluation of the dong against the dollar only enhances the threat, they add.

Production enterprises dependent on imported materials have to bear higher input costs and are likely to increase prices.

The State Bank of Vietnam on August 18 set the daily reference rate of the dong two percent lower at 18,932 to a dollar, the third devaluation since last November, in a move aimed at reducing the trade deficit.

The dong was little changed at 19,485 per dollar as of 9:10 a.m. Thursday in Hanoi, compared with 19,490 a week ago, according to data compiled by Bloomberg.

Dao Duy Kha, deputy general director of the Vietnam Plastics Corporation, said up to 90 percent of materials for the country's plastic production was imported, thus the lower value of the dong was a big blow.

The gasoline price hike early this month had already pushed up their production costs and the higher dollar prices now make an increase in selling prices "unavoidable," he said.

Some association members have already increased their prices, while others will do so soon, with an average increase at 1-2 percent, he added.

Kha said firms have not increased their prices sharply because current purchasing power in the market was still low. "However, the prices will continue to rise in coming months when the demand for products goes up."

Tran Trung Hieu, general director of Hanoi Investment and Footwear Export-Import Company, which imports materials for footwear production and sells them to local producers, said he will increase prices to match the dollar hike.

However, he cannot raise prices under contracts signed months ago that are due to be delivered now. "We are suffering losses from the contracts," he said. His company imports materials worth US$100,000-200,000 each month.

Meanwhile, the price hike has also affected a number of customers. "Some customers have cancelled their orders, while others have cut their buying volumes," Hieu said. His company has had to lower its profits significantly to keep their traditional customers, he added.

The increase in costs of imported materials has also prompted many supermarkets to announce plans to increase their retail prices.

Nguyen Thanh Huyen, public relations manager for the Big C supermarket chain, said some distributors have proposed to raise their products' prices by 5 to 10 percent.

Another supermarket chain, Maximark, has received proposals from over 100 distributors on increasing, by 3 to 10 percent, prices of 500 kinds of products, mainly food, cosmetics and home appliances.

The price increases have sparked inflation fears.

Vietnam's consumer price index rose 8.18 percent in August from a year earlier, and 0.23 percent from a month earlier, the General Statistics Office said. In July, the index rose 8.19 percent from a year earlier.

"A very important implication is that the outlook for inflation is likely to be affected by the devaluation. The devaluation, of course, is going to raise the risk of imported inflation in the months ahead," Bloomberg quoted Tai Hui, head of Southeast Asian economic research at Standard Chartered Plc in Singapore, as saying.

The dong will trade near 19,500 per dollar for "at least the next several weeks," he said.

If inflation accelerates or the trade deficit deteriorates, "you may see more selling pressure on the dong. But, of course, that's very much down to the upcoming data that we expect to see at the end of the month," he said.

Vu Dinh Anh, deputy head of the Institute of Market and Price Research, said: "Inflation control should be the most important target for the end of this year. There is now a subjective complacence as consumer prices have only seen small hikes in recent months."

The government aims to cap inflation at 8 percent this year, though many local analysts say that will be difficult to achieve.

Firms should carefully watch for changes in the exchange rate. They should prepare sources of the greenback to repay dollar loans on schedule, and use other foreign currencies, which have lower exchange rates, Anh said.

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