Posted on 29 November 2007

 

Source: Vietnam News, November 28, 2007
Petrol prices throw fuel on the fire

Customers at Cong Quynh supermarket in HCM City. Consumer prices have been rising faster than usual this year. — VNA/VNS Photo Thanh Vu

Government measures to control rising consumer prices have been largely ineffective so far, with the General Statistics Office (GSO) yesterday reporting that November prices surged to a new record high of 10.01 per cent year-on-year.

According to Nguyen Duc Thang, deputy director of the GSO’s Trade and Price Department, the sudden price hike of 9.45 per cent in the first 11 months of this year eclipses the same period of last year, when prices rose by only 6 per cent.

The main cause of the price hike is floods continuously hitting the country’s central region during the past month. The floods have strongly contributed to the increase in prices of food and foodstuffs, a group of commodities accounting for nearly 40 per cent of the CPI commodities basket.

Thang also attributed the CPI surge in the first 11 months of the year and in November alone to the continuously increasing price of imported materials for production such as wheat flour, steel ingot and gas.

This month, the gold price rose sharply by 12.78 per cent compared to last month, causing the 11-month hike of 24.69 per cent. Meanwhile, the US dollar only increased 0.68 per cent month-on-month.

GSO data has been a benchmark all year for tracking inflation and has been a cause for concern for several months as the Government struggled to keep the inflation rate below the annual GDP growth rate, currently estimated to be 8.5-9 per cent by year’s end.

The Ministry of Finance threw fuel on the inflationary fire, literally, when it moved on November 22 to increase petrol prices by a whopping 15 per cent from VND11,300 to VND13,000, in response to surging world petroleum prices.

The higher pump prices were expected to drive up the prices of many consumer goods and services.

"Even before the petrol price increase, authorities had been struggling to keep the CPI under control... With that decision, it will be impossible to keep inflation below the growth rate," said Dr Vo Tri Thanh of the Central Institute for Economic Management, predicting a full-year CPI of 9 per cent.

Fiscal measures

Using monetary policy to cool inflation, the State Bank has called in currency and issued bonds, following its move last May to increase the reserve ratio among commercial banks, all in an effort to eat up excess liquidity in the financial markets.

This has seen bond prices fall and yields rise to 14-month highs. A one-year Government bond now yields 7.53 per cent, a 5-year bond 8.41 per cent and a 10-year bond 8.89 per cent.

"There is significant uncertainty over what this all means for Vietnamese bonds," Katie Dean of ANZ Bank wrote in a November report. "This is largely because of the uncertainty around the evolution of [the State Bank’s] approach to tackling inflation."

"Capital inflows have been largely sterilised by the State Bank already. Of course, there is still concern that, if the inflows get larger, the State Bank will not be able to limit liquidity because they have only limited tools," said Tai Hui, an economist with Standard Chartered Bank.

The last reserve ratio hike was at the end of May, and it typically takes three or four months for such a measure to work its way through the system, according to State Bank senior economist Nguyen Quang A.

Capping the dong

In the scope of monetary policy, the goals of keeping inflation low, stabilising exchange rate and maintaining high economic growth have been at odds.

The central bank has actively attempted to depreciate the dong by about a half-per cent to one per cent per year against a US dollar that has been plummeting against other world currencies.

"In this environment, we anticipate that authorities will allow the dong slowly and slightly appreciate in an attempt to not fuel inflation further," Dean said.

ANZ Bank lowered its forecast for the dollar-dong exchange rate to VND16,040 by the year end, against VND16,136 in October and VND16,240 earlier in the year.

Depreciating the dong is a double-edged sword, it makes exports cheaper in US dollar terms, but also makes imports more expensive for local manufacturers.

"The Vietnamese government’s strategy to jointly pursue strong economic growth and Vietnamese dong depreciation has become increasingly difficult to sustain," said Dean.

 

«  Back