"If people are comfortable using dong again a

Vietnam Steps Up Its Inflation Fight

By JAMES HOOKWAY, 25 February 2011



Vietnam's leaders unveiled measures aimed at curbing soaring inflation rates Thursday, even as residents worried over electricity- and fuel-price increases that are sending energy costs as much as 24% higher. It's a time of spreading unease about the stability of this fast-growing economy. Communist-run Vietnam has one of Asia's worst inflation problems, with a consumer price index that hit a two-year high of 12.31% this month. Prices are set to rise still higher in the coming months as the effects of the energy-price increases and a recent 8.5% currency devaluation against the U.S. dollar—the latest in a series—work through the economy. Recognizing the concerns, on Thursday the government said fighting inflation was now its top priority.



Among the measures approved by Prime Minister Nguyen Tan Dung were a limit on credit growth this year to less than 20%, compared with more than 28% in 2010, and a cut in the budget-deficit target to less than 5% of gross domestic product from the previous 5.3%. The government also ordered state-owned companies to sell their foreign-currency holdings to the country's banks to ease downward pressure on the country's currency, the dong. Taken together with a number of interest-rate increases last week—including one of two percentage points, to 11%, in the rate the central bank charges commercial lenders for capital—this shift could mark a break from years of relentlessly pro-growth policies, economists say. Those polices, while delivering rapid growth, have also left many Vietnamese worried about a soaring cost of living and quickly depreciating currency.



Sherman Chan, an economist with HSBC in Hong Kong, said the recent measures show Vietnam's leaders are finally trying to impose some control on its roller-coaster economy. "Vietnam's reached a stage where it shouldn't go back on its policies, and we expect to see more monetary tightening in the months to come," she said. Economists closely watch Hanoi's efforts to contain price rises as a way of gauging the stability of what is still one of Asia's most-promising emerging markets, posting 6.78% economic growth last year.



The big question is whether Vietnam will tolerate the short-term pain of its tougher new policies or revert to aggressive, pro-growth policies—as it has in the past. In 2010, for example, policymakers attempted to contain inflation by raising interest rates and limiting credit growth, but when the situation appeared to improve in the middle of the year, they loosened credit growth again—and inflation began creeping up into double digits. Many economists also view Vietnam as an indicator of what other countries might face if they fail to effectively deal with rising prices at a time when the surging oil and food costs are rattling emerging-market investors.



While there appears to be little prospect in heavily policed Vietnam of the sort of regime-shaking protests that have hit Middle East, there is widespread concern on the streets of Hanoi about the latest round of price increases, and whether the government will be able to get a grip on inflation. Cars and the country's ubiquitous motorbikes queued up at gas stations in Hanoi and other cities Thursday, rushing to buy before 10 a.m., when fuel suppliers were allowed to raise gasoline prices 17.5% to 19,300 dong (92 U.S. cents) a liter and diesel prices 24% to 18,300 dong a liter. Those who missed the deadline were left to rue the cost. "I was too lazy to go fill up my tank last night, and now it's going to cost me 200,000 dong more," complained one driver, 39-year-old Hoang Hop. "I can't imagine prices could soar so high," said 54-year-old Duong Minh Hoang. "Now I'm worried my salary won't keep up with rising prices."



Vietnam's government subsidizes fuel and covers some costs for importers. The expense is mounting as global crude-oil prices rise amid the unrest in Libya, and because oil is priced in dollars, last week's currency devaluation compounds the problem. Electricity prices will rise 15% as of March 1, in hopes of making generating electricity profitable, and so attract foreign investment to build badly needed power plants. One key gauge of Vietnam's new policy direction, some analysts say, will be the dong. The currency has lost 20% of its value since mid-2008, and many ordinary Vietnamese speculate in gold or real estate to preserve their wealth while others seek out foreign currencies. "If people are comfortable using dong again and don't expend all their energy by speculating in nonproductive activities such as trading gold, then the government will know they are succeeding," said one Vietnam-based economist who declined to be identified.
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