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Inflationary Pressure Falls

06/08/2010 - 109 Lượt xem

Inflation in Vietnam will moderate over our forecast period, despite soaring prices in 2005. The consumer price index rose 8.5% y-o-y in November, bringing inflation for the first 11 months of the year to 8.3%, according to official figures. As a result, the government has raised its 2005 inflation forecast to 8%, from 6.5%, bringing the official forecast into line with our 8.3% inflation forecast for 2005.

There are three major factors behind the increase in inflation in 2005. The main reason was the government’s decision to cut oil price subsidies three times. In response to the rising oil price, the government cut oil price subsidies three times in 2005, to reduce the burden of fuel subsidies on the state’s budget, leading to a surge in transport costs.

New outbreaks of bird flu also appear to be contributing to inflationary pressures. Food accounts for nearly half the basket that Vietnam uses to calculate its consumer price index, and with the avian flu virus threatening to reduce food supplies again, food prices have been rising. Increasing costs of housing and construction materials are the third reason behind the higher prices. This partly relates to the higher oil prices, with energy costs of the manufacturing process going up, although stronger domestic demand for houses is also contributing to the rise.

Prices are expected to continue accelerating for the remainder of 2005. Following the 20.7% rise in the minimum monthly salary for state employees from October, yearend bonuses should further raise the population’s purchasing power. Combined with the start of the major shopping season in advance of the New Year festival, BMI therefore expects inflation of 8.5% y-o-y by the end of the year.

However, we are more optimistic about price pressure ahead. This is again mainl due to the trend in global oil prices, with crude prices expected to moderate over our forecast period. The need for further fuel price hikes in Vietnam will therefore be lessened.

In November, Vietnam in fact cut the price of petrol by 5% due to lower world oil prices. Meanwhile, official measures to deal with a possible widespread outbreak of avian flu should ease concern over food supplies and slow the rise of food prices.

At the same time, the government is aware of the inflationary pressures, with Prime Minister Phan Van Khai telling his cabinet to work out plans to control prices over the next five years. The government has already launched several tough measures, for example, instructing state offices to reduce their total spending on oil and gas by at least 10%. Monetary policy is also being kept fairly tight with the lending rate expected to average 11.5% in 2005. Furthermore, the State Bank of Vietnam has attempted to restrain credit growth, allowing banks to raise the interest rate ceiling on dollar deposits by 0.2-0.5 of a percentage point. However, underlying price pressures still remain in the economy. Optimistic government growth targets, for example, could also impact on inflation. In order to sustain the high rates of growth into 2006, with officially targeted expansion of 8%, the government may be tempted to boost spending.

Even without the inflationary impact of injected state funds, buoyant consumer demand could put upward pressure on prices.

Furthermore, the forecast weakening of the Vietnamese currency against the US dollar could also contribute to inflation, as import costs rise. Therefore, although we expect inflation to moderate over our forecast period, the risks to our forecast remain weighted to the upside.

Source: South East Asia Monitor Volume 1, Jan2006, Vol. 17 Issue 1.

RISK SUMMARY

POLITICAL RISK
Religious Freedom In Question
The US State Department has named Vietnam as a serious violator of religious freedom along with China and North Korea, in its annual report to Congress in November. Although the US notes some progress, with the passing of new laws and opening of closed churches, Vietnam remains on America’s blacklist of ‘countries of particular concern’. The jailing of six Montagnards, mainly Christian hill-people, in November on security charges supports the US decision. Despite the concerns, Pope Benedict recently created a new diocese in the country, signalling improved ties between the Holy See and Asia’s second-largest Catholic country. Our short-term political rating remains at 80.

ECONOMIC RISK
WTO Entry Expected In H106
Vietnam now expects to join the World Trade Organisation (WTO) in the first half of 2006, according to President Tran Duc Luong. Officials had previously aimed to join the WTO by end-2005, but the bid faced difficulties due to bilateral differences with the US, Vietnam’s second largest trading partner, over the speed of the communist government’s economic and legal reforms.
Membership of the WTO will allow Vietnam to compete more fairly with 150 nations worldwide, boosting export levels. However, any delay beyond mid-2006 could lead to a slowing of the reform momentum. Our short-term economy rating rises to 59, from 56, amid expected WTO accession.

BUSINESS ENVIRONMENT
Tourism Growth Continues
The outbreaks of bird flu in Vietnam have so far not affected business for tour operators, according to the National Tourism Association.
Unlike the previous SARS outbreak, tour operators have not seen a decline in bookings this year, with the government estimating that foreign tourist arrivals were up 18.8% y-o-y to 3.14mn in the first 11 months of 2005.
In an effort to sustain these numbers, the government has ordered tour operators to stay away from areas where bird flu outbreaks have occurred, and told restaurants to remove all poultry dishes from tourist menus.
Our business environment and short-term composite ratings increase to 46.8 (from 46.2) and 68.7 (from 66.9) respectively.