Fears of a looming price shock
06-AUG-2008 Intellasia | Vietnam Investment Reviews page 13
Aug 6, 2008 - 7:00:00 AM
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Cooled inflation in July maybe translated into an encouraging result of government measures to combat the rampant consumer price index. Yet, it is too early to take a relaxing breath.
The 1.13% rate recorded in July compared with June is something like inflation having touched the bottom considering the average monthly consumer price index (CPI) rise of 2.86% in 2008's first half. It can also be viewed as one of the first successful steps towards obtaining the government's target of controlling inflation at around 25% this year.
However, there still exist at least three major drawbacks. The first is the spill over effect of the recent sharp petrol price hike. Despite government authorities' efforts to monitor the domestic market in the face of the 'second-round' effect of the petrol price hike, several essential products are expected to see higher prices in August. The announcement by the Northern Automobile Transport Association to raise transport charges by 8-10% from August 1 is a notable example.
This is not the first time such a "second-round" effect is foreseeable. The recent two sharp petrol price increases have provided clear evidence of how consumer prices are adjusted accordingly. On November 22 last year, petrol retail prices were substantially increased for the eleventh time since 2004, and the CPI quickly responded by rising 2.91% in December, the highest rate during the 15-year period. But the next escalation was even more significant in March this year, when the CPI climbed by 2.99% over the previous month after petrol retail prices were dramatically hiked once again.
Given such precedents, there is evidence for a wildly fluctuating CPI this month, unless drastic and effectively executed measures are put in place by market monitoring authorities. If the government wants to be successful in keeping inflation at around 25% for 2008, the CPI must be kept completely still during the last quarter.
The second drawback lies in the country's animal husbandry industry, which is holding back the overall development of the agriculture sector. Since foodstuffs make up 25.2% of the consumption basket for calculating CPI, the animal husbandry sector's forecast growth rate of 0% for 2008, which has not been seen for many years, will amplify the imbalance of domestic foodstuff supply and demand. This inactivity is also a cause of agriculture production growth slowdown for the third consecutive year, to hit a low rate of 3% for 2008 according to General Statistical Office estimates. In 2006 and 2007, agriculture production growth rates were reported at 3.42% and 3.41% respectively, compared with an average of 3.83% per year during 2001-2005.
The third drawback stems from the global commodities market, which periodically sees a price 'fever' in the last months of the year. This is quite meaningful for Vietnam, a country heavily depending on imported materials.
According to the International Monetary Fund statistics, the world's average commodity prices hit 135 percentage points in 2007 and quickly grew to 162.4, 171.3, 181.2, 189.5, 203.7 and 215.2 in the first six months of this year. Noticeably, the average world commodity price is often higher in the second half of every year, according to statistics collected since 2004. Specifically, it was 76.5 percentage points in the first half of 2004 and 84.4 for the second half. In 2005, 2006 and 2007, the respective figures were 93.2 and 106.1, 119and 122.4, 124.2 and 145.7.
The three mentioned drawbacks suggest that only effectively undertaken measures can help maintain the CPI growth at a targeted pace of 1% per month in the last five months of this year to keep inflation at around 25% for 2008.
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