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Vietnam Business » Vietnam Economic News » Vietnam 8% Inflation Target Likely Still Unmanageable

Vietnam 8% Inflation Target Likely Still Unmanageable

Vietnams new inflation target might still be too ambitious on highly CPI data in Jan-April and a continuing pickup in economic activities, thanniennews reported citing economists as saying.

Vu Dinh Anh, deputy head of the Ministry of Finances Institute for Market and Pricing, said the country could only reach its new inflation curbing target of 8% if consumer prices are kept below 3% for the rest of the year, which is "very difficult," in his opinion.

The difficulties come from the fact that the government must also ensure its 2010 economic growth target of 6.5% in the context of consumer prices already hitting 4.27% by April.

The Institute for Market and Pricing is analyzing price movements this month after the raise of minimum wages became effective from May, Anh said, adding that the prices of food and grain have not yet shown signs of sharp increase while demand is typically low in summer.

Senior 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-sensitive country like Vietnam to control the impacts of higher prices of input materials, especially in the time when the global economy is recovering, Doanh analyzes, adding that Vietnams considering big investments to serve economic growth would make the task more challenging.

Ayumi Konishi, Asian Development Bank (ADB) Country Director for Vietnam, said the country should not "rush" ahead and instead should focus on economic stability and efficiency. "Without enhancing the efficiency of the countrys economic systems, attempts to achieve a higher economic growth rate will inevitably invite the return of high inflation, and peoples 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% on account of last years 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 Banks 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% 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% from 8.9%."

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%, instead of our previous forecast of 10%," Tai Hui said.

Need to increase added value

Vietnam aims to limit its trade deficit to no more than 20% 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% of overseas sales, and in April it widened 8% 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 Singapores 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."

The government raised this years inflation goal to 8% early this month from the previous 7% as strengthening economic growth has pushed up prices.

Vietnam Business And Financial News Network. Source [stox.vn]

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