Wednesday, 23 February 2011

Vietnam: Inflation, again

The government's continued fight against inflation could be damaged by the latest devaluation. Inflation rose to 12.17 per cent last month, the highest rate since the government brought it under some control after the peak of 2008, when it reached over 24 per cent.

Inflation stood at over 10 per cent for much of 2010, well above the government target of 7 per cent of the year. While the devaluation may reduce Vietnam's reliance on imports, the burgeoning trade deficit could continue to expand. In January alone it reached $1 billion: imports of $7 billion and exports of $6 billion. The government is target¬ing a trade deficit of $14.2 billion for 2011, up from $12.4 billion in 2010.

Vietnam remains very reliant on imports, especially for consumer goods. In 2008, according to United Nations trade data, it imported $5 billion in steel, $1.5 billion in fertilisers, $2.4 billion in telecom equipment (mostly from China), $11 billion in petrol, and $2.7 billion in gold. However, exports continue to be mostly resource based, such as coffee ($2.1 billion), rice ($2.8 billion), and seafood ($3.8 billion), with oil accounting for $10.4 billion.

Continued government support for exports does not inspire much confidence, especially after the general failure of currency devaluations over the last 14 months either to increase exports or to reduce imports.

Dariusz Kowalczyk, Credit Agricole CIB's senior economist, questioned the government's focus: "It seems the authorities are trying to support exports and to support growth rather than to fight inflation. That's very surprising because inflation is a major problem." Well, one of several.

For more news and expert analysis about Vietnam, please see Vietnam Focus.

© 2011 Menas Associates

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