Emerging Markets: Vietnam claims it can handle inflation

Emerging Markets, May 4 2011

Vietnamese policymakers insist they can tackle the country’s alarming inflationary pressures but have conceded that previous targets may be beyond them.

Vietnam’s National Assembly had set a full-year target for inflation growth in 2011 of below 7%, which looks highly ambitious in light of April’s 17.5% year on year CPI growth, with some analysts putting food inflation as high as 24%. “The targets have not been revised officially,” said Nguyen Van Giau, Governor of the State Bank of Vietnam, the country’s central bank. “However, I think that Vietnam, and other countries, are now facing difficulties in realizing the targets. They were set four or five months ago and new issues have arisen,” he said, highlighting global commodity price increases, Middle East politics and the Japan tsunami as unexpected influences.

Vietnam’s Minister of Planning and Investment, Vo Hong Phuc, said yesterday that “in 2011 our top priority is to combat against inflation,” and conceded that the previous policy – growth at expense of all other considerations – had to be revised. “The economic growth rate is no longer the number one priority,” he said. “We will try to sustain rapid economic growth, but not at any cost.” He said he hoped for 6.5% economic growth in 2011.

The centerpiece of Vietnam’s efforts to combat inflation is the so-called Decree 11, issued in February.  This is a six-point plan designed to combat inflation and improve macroeconomic and social stability, including tighter monetary control, maximum credit growth of 15% in 2011, reduction of imports and changed pricing mechanisms. These measures have coincided with a drop in the value of Vietnam’s currency, the dong. Governor Giau told Emerging Markets of his “strong belief that Vietnam will be able to control inflation in future” through these measures.

Ayumi Konishi, the ADB’s country director for Vietnam, said the country was doing the right things to tackle inflation but that they would take time to be effective. “We do believe Resolution 11 contained the right set of policies to control inflation and stabilize the macroeconomic situation,” he said. “However, economic policies always take time to have an impact. It’s not like poison: you don’t see the result overnight.”

“We hope the government will continue to be determined to follow this policy, and we hope the Vietnamese people will be patient,” he added. “Controlling inflation means there will be some pain.”

Analysts have tended to see Vietnam as the architect of its own inflation problems. “Up until February this year, Vietnam still had a very clear policy objective: growth at all costs,” said Tai Hui, regional head of research for southeast Asia at Standard Chartered. “Last year inflation started to pick up but they refused to raise rates – in fact, cut rates to boost growth. It was an amazing response.” For Mr Hui, the February measures, along with interest rate rises at that time, “were a major turning point for Vietnam. The government and central bank are now aligned to fight inflation – but they key is execution.” Mr Hui expects inflation to get worse before it gets better, likely hitting 18% and keeping pressure on for currency depreciation. “The patient has started to be given the right medicine but it will take time to recover.”

Many feel that problems have arisen because of a lack of independence of the central bank, but Governor Giau denied this to Emerging Markets yesterday. “Even though we are a member of the government, and it may give the impression that it means we don’t have autonomy and independence, our law allows the State Bank of Vietnam to have a certain level of independence in exercising our monetary policy.”