Monetary tightening to continue in 2008
Prime minister Nguyen Tan Dung has approved measures and called for a well-managed monetary policy to sustain economic growth at 8.5-9% and control inflation this year. The PM also urged the ministries to take measures to stabilise the overheated property market by forming a property management taskforce.
The State Treasury plans to issue 9 trillion dong government bonds in the first quarter of 2008, tripling the size sold in the first quarter of 2007, for infrastructure projects and in a bid to curb inflation. For the whole year of 2008, the State Treasury plans to sell 80-90 trillion dong worth of government bonds, compared with a total of 50 trillion dong sold in 2007.
The State Bank of Vietnam (SBV) has aimed to slow credit growth to no higher than 30% in 2008 after bank loans jumped by 37.8%, well above the target of 28%, in 2007. The SBV has kept the prime lending rate at 8.25% but will continue selling bills and notes to continue draining liquidity.
Elevated inflation and increased supply of government bonds will likely limit the downside of bond yields at least through the first half of 2008. With inflationary pressures coming not only from the demand and liquidity sides but also reflecting elevated world oil and (food and construction) commodity prices, we think the SBV could tolerate a slightly larger scope of appreciation of the dong against the US dollars by limiting its US dollars purchase.
The dong was traded on the interbank market at l5,980 dong per US dollars on January 14 (based on Reuters data), with the dong/US$exchange rate down 1.7% from its level in mid-August The strong US dollars supply by foreign investors and remittances from overseas Vietnamese before the Tet holiday has weighed on the US dollars vs. the dong.
Rapidly tightening financial conditions and deteriorating consumer fundamentals (slowing jobs and wages, declining housing and equity wealth, rising energy costs) have sharply raised the risk of a deep US cyclical downturn and the case for substantial US Federal Reserve easing (we anticipate further 150bps cuts in US Federal Reserve funds rate from 4.25% currently). Our forecasts for continued strong growth in emerging markets points to a broad US dollars decline against major emerging market currencies. We expect the dong to appreciate by about 1% vs. the US dollars in 2008.
However, with closer economic ties between emerging markets and industrialised countries than ever before, our outlook for emerging market resilience relies on forceful monetary easing by the major central banks to arrest downside risks in key industrial economies, as well as sound economic fundamentals in many emerging countries, including Vietnam.
Should either of these preconditions come into question, emerging market currencies could fall sharply, and the dong would also come under depreciating pressures.
Category: Finance
