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Copyright © 1998-2013  Vietnam Venture Group, Inc. All rights reserved.   June 2, 2008

INFLATION SPECIAL REPORT
May 2008

 

Extraordinarily high rate of inflation for May 2008

Adapted from http://www.iht.com/articles/ap/2008/05/27/business/AS-FIN-ECO-Vietnam-Inflation.php and http://online.wsj.com/article/SB121206638209529225.html?mod=googlenews_wsj other sources, and V V G staff reporting.

Surging food and construction costs drove Vietnam's inflation rate to 25.2 percent in May, the highest” since 1992. The rate of inflation we have been reporting for the 1st four months of 2008, taken from domestic Vietnamese sources, has been woefully under reported. This has been corrected for January, April, and May in our current report.

Up from 21.4% in April and 14.1% in January, a slow government response was in large part to blame. When oil and food prices began to rise late last year, the State Bank of Vietnam, hoping to sustain growth, was slow to rein in inflationary pressure by raising rates or clamping down effectively on irresponsible lending. Efforts to control inflation proved ineffective -- such as a loosening of the currency's dollar peg, which backfired largely because of lending practices.

Vietnam's exports were up 27 percent in May from a year ago, and foreign investment pledges reached US$15.3 billion in the first five months of this year, more than double the same period last year. Still, authorities foresee slower growth ahead. Earlier this month, Vietnam slashed its annual growth target to 7 percent from 8.5 percent.

To combat inflation Vietnamese authorities told banks to cut lending, put in place some price controls and instructed government agencies to halt non-essential construction projects. Last week the central bank raised its key interest rate to 12 percent from 8.75 percent and allowed banks to offer lending rates of up to 18 percent.”

Real property owners who bought with borrowed money are trying to sell to take back capital for debt payment.  Some observers note that prices are adjusting down in the markets where properties were bought with borrowed funds as well as private funds.

The State Securities Commission is seeking government approval for measures to help prop up the country's stock market. The market fell more than 53 per cent this year while “Regulators stand aside as 400-point barrier looms (27-05-2008) HA NOI — The HCM City Stock Exchange commenced a new week with another losing session, following three straight weeks of non-stop declines. The VN-Index yesterday fell another 7.54 points to close at 420.51, a loss of 1.76 per cent.” (Viet Nam News)

The currency traded at the official rate of 16, 221 per dollar (the black market rate is 17,500) in Ho Chi Minh City, weaker than yesterday's (26 May 2008)16,206. The currency's strongest level this year was set on March 21, when it touched 15,810.

We know young middle managers who only recently started to earn high salaries and invested heavily in both the real property and stock markets of Vietnam.  As more investors loose their stock portfolios (personal losses from US$ 10,000 to US$ 40,000, from 50% to 70% of the high value are commonly reported) and give up by selling stocks and real property to recover something, the demand for real property will start to decline if not fall rapidly as well as the stocks.

This is not a time for predictions but for watchful waiting.  Investors with cash, who know a property is truly under valued (a difficult trick in Vietnam where nearly everyone overstates earnings and growth), could buy now, but most we know claim they have no confidence the floor has been reached and are holding off most major purchases.

Vietnam's inflation hits 25.2 percent, highest in a decade, as food, construction costs soar

The Associated Press, Published: May 27, 2008 http://www.iht.com/articles/ap/2008/05/27/business/AS-FIN-ECO-Vietnam-Inflation.php

HANOI, Vietnam: Surging food and construction costs drove Vietnam's inflation rate to 25.2 percent in May, the highest in more than a decade, the government said Tuesday.

Despite authorities' efforts to control inflation, including interest rate hikes, consumer prices were 4 percentage points higher than last month, according to the Government Statistics Office.

Vietnam's inflation rate is among the highest in Asia, and higher food prices in particular are hurting the country's poor.

Overall food costs were up 42.4 percent from a year ago, driven by a 67.8 percent jump in the price of grain, including rice, the staple food. Housing and construction materials rose 22.9 percent over last year.

Analysts say Vietnam's surging inflation is being driven by both domestic and global forces, including soaring fuel and food costs. Rapid economic growth and looser lending policies in recent years, which has spurred investment, also have contributed.

The communist government has made fighting inflation its top priority. The central bank raised by interest rates 3 percentage points to restrain borrowing and encourage saving.

In the past few months, the government has also postponed public investment projects and ordered state agencies to cut spending by at least 10 percent.

The impact of these policy changes should be felt in the second-half of the year, said Jonathan Pincus, chief economist of the United Nations Development Program in Hanoi.

"The economy is still healthy, with exports and foreign direct investment soaring," he said.

Vietnam's exports were up 27 percent in May from a year ago, and foreign investment pledges reached US$15.3 billion in the first five months of this year, more than double the same period last year.

Still, authorities foresee slower growth ahead. Earlier this month, Vietnam slashed its annual growth target to 7 percent from 8.5 percent.


Vietnam Inflation Crisis Is Feared

Government's Moves
To Curb High Rate
Deemed Inadequate
By JAMES HOOKWAY
May 30, 2008; Page A6

http://online.wsj.com/article/SB121206638209529225.html?mod=googlenews_wsj

Vietnam's accelerating inflation is threatening to morph into a full-blown crisis, and it provides a warning to other Asian countries trying to tamp soaring prices.

The government said this week the inflation rate in May was 25.2% on an annual basis, up from 21.4% in April and 14.1% in January. A slow government response was in large part to blame. When oil and food prices began to rise late last year, the State Bank of Vietnam, hoping to sustain growth, was slow to rein in inflationary pressure by raising rates or clamping down effectively on irresponsible lending. Efforts to control inflation proved ineffective -- such as a loosening of the currency's dollar peg, which backfired largely because of lending practices.

So far, economists say there is limited scope for Vietnam's troubles to infect other Asian economies. But Vietnam presents a worst-case scenario of what could happen if the region's central banks don't act swiftly to curb rising prices at a time when their economies -- unlike those of the U.S. and Western Europe -- are still showing robust growth.

After a building boom amid low interest rates and an export boom because of a weak local currency pegged to the dollar, Vietnam's economy has reversed course. The stock market's main index is down 55% this year, and the prices of goods are rising sharply.

Morgan Stanley, in a report Wednesday, warned that loose lending had created a banking crisis. It forecast that Vietnam's currency, the dong, could weaken dramatically against the dollar in the coming year.

On Thursday, Fitch Ratings lowered its outlook for Vietnam's sovereign debt to "negative" from "stable." The country's policy response to rising inflation "has been both too slow and too small," the agency said.

Many Asian central banks have made controlling inflation their primary policy objective in recent years. But relatively few are genuinely independent, making them subject to political pressure to maintain economic growth.

Some, such as India and China, have opted to mop up excess liquidity in their financial systems by imposing new reserve requirements on their banks rather than raising interest rates to levels that might do more to stanch inflation. Others are waiting to see whether larger harvests will ease food bills, which are 40% or more of the consumer-price index in countries such as Indonesia and the Philippines.

Vietnam's experience shows the danger of waiting too long before taking decisive action to head off inflation. "What's happening here in Vietnam is the Asia of 10, 20 years ago," said Spencer White, a strategist and member of the board at Thien Viet Securities in Ho Chi Minh City. "There's not much financial integration with the other Asian markets at this point, but it could damage the broader appetite for frontier markets."

A year ago, Vietnam was the darling of global investors. International banks such as HSBC Holdings PLC bought into local banks. Property developers from South Korea and Taiwan began work on huge developments to build office space in Hanoi and Ho Chi Minh City.

Global manufacturers also streamed into the country, partly to escape rising wage and land costs in China but also to tap a young and industrious work force who saw a glimpse of prosperity after years of war and stagnation. Foreign companies sought approval to invest $20 billion in the country last year -- a third more than in nearby Thailand -- adding to the inflationary pressure by driving up land costs, skilled-worker wages and office rents.

The country's biggest state-run enterprises began diversifying, hoping to become powerful conglomerates to compete with the foreign firms that began arriving in Vietnam following its accession to the World Trade Organization.

Some of Vietnam's senior leaders questioned Prime Minister Nguyen Tan Dung's determination to build up these new businesses, often with cheap loans from state-run banks. A former prime minister, Vo Van Kiet, wrote a public letter to Mr. Dung last year saying these were precisely the mistakes South Korea, Malaysia and others made in the run-up to the Asian financial crisis of the 1990s.

As inflationary pressures began to rise last year, some government economists say, the central bank didn't want to cut off the low-cost loans. "Much of the central-bank policy was driven by the government's agenda of promoting as much economic growth as possible while at the same time making sure that state-run enterprises would play a bit part in the economy in the years to come," a Vietnamese economist said.

People familiar with the situation say that, earlier this year, as higher prices sparked protests and strikes, Mr. Dung instructed central-bank governor Nguyen Van Giau to act more aggressively to contain inflation.

The central bank widened the range in which the dong could trade against the dollar. The idea was to free the local currency from a sliding U.S. currency and to enable Vietnam to better absorb higher oil costs. Instead, the move triggered panic among a population that for years used the dollar as a convenient alternative to the unwieldy Vietnamese currency, whose largest bank note is the rarely seen 500,000-dong bill -- worth about $30.

Some local banks refused to exchange dollars, and local stock prices collapsed as banks held on to their dong and refused to lend money to buy shares. Mr. Dung in March lowered Vietnam's growth target for 2008 to 7% from 8.5% to help focus the drive against inflation.

Since then, a global spike in food prices and a poor rice harvest have made things worse. The central bank expects Vietnam's current-account deficit -- the difference between a country's import and export of goods and services -- to hit 7.5% of gross domestic product this year, up from 5% in 2007. The current-account deficit in Thailand was 6.5% of GDP when it was forced to devalue the baht in 1997, triggering the Asian financial crisis.

The Vietnamese, meanwhile, have been draining bank accounts and buying gold instead. Some have also started hoarding dollars as a hedge against inflation.

Apartment prices in Ho Chi Minh City, the country's commercial hub, have fallen by half so far this year, local media reports say. Morgan Stanley estimates loan growth has been expanding at over 35% a year and exposure to the property market is about 10% of total loans.

Write to James Hookway at james.hookway@awsj.com


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