Vietnam inflation set to climb, affect markets
25-JUL-2008 Intellasia | The Economic Times
Jul 25, 2008 - 7:00:00 AM
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Vietnam's steep rise in fuel prices will lead to a big jump in inflation, put fresh pressure on the local currency and stocks and probably prompt another round of monetary tightening, the Asian Development Bank said.
Ayumi Konishi, country director of the ADB's Vietnam operation, said he broadly agreed with the path Vietnam had taken to cool an overheating economy, and also on the need to cut the fuel subsidy bill. But Monday's 31% rise in petrol prices was a surprise, both because of its magnitude and because the government had pledged not to raise fuel prices, he said.
"This will mean that we will see a huge jump in CPI figures in August and it may take some time for the situation to calm down," Konishi said on Wednesday. "That will again bring a negative impact on the stock market, worsen trade deficit situation and the currency can face another wave of pressure."
State media reported the government expects inflation, measured by the consumer price index (CPI), to hit 25% this year, almost double last year's pace. Konishi feels inflation could hit 30% by September. Inflation has been in double-digits since last November and reached an annual 26.8% in June.
The State Bank of Vietnam has raised rates three times this year and placed new limits and controls on bank lending. The government has lowered its growth target for 2008 to 7%, 1.5%age points below last year's pace. The ADB forecasts growth this year at 6.5% and anticipates more rate rises.
"Probably one notch or more of tightening may still be necessary," Konishi said. At the same time, the central bank ought to watch out for lenders which may buckle under the pressure of tighter funding and the deteriorating quality of loans, he said. "We are aware that there are banks facing greater difficulties. "The State Bank must catch the problems early before the problems become too difficult to handle. We do not want to see bank failures in Vietnam," he said.
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