Vietnam’s inflation targeted at 8-9pct in 2012: NFSC

According to NFSC, in the period from 2006 to present, Vietnam’s inflation has always stayed at 2-digit levels (except 2009) with an average increase of 11.5% per year, more than 2 times against the level of 5.2% per year during 2001-2005.

Over the past time, inflation has been a persistent problem and the most damage to Vietnam’s economy as it appeared more frequent, longer and stronger than other countries in the region and the world.

Causes of inflation

The research of NFSC showed that high inflation of the over past years has resulted from many factors, including:

Imported inflation: Because Vietnam’s economy has had close links with international markets, so price shocks, especially the cost of fuel and food, have contributed to higher consumer price index (CPI) in Vietnam. However, the influence of world prices to domestic prices was part and not the determining factor to CPI increases. The evidence is that many countries in the Asian region also suffered the impact of international prices, but saw lower levels of inflation than in Vietnam.

Cost-push inflation: inflation in the country has been affected by cost-push, including the adjustment of exchange rates (as calculated by NFSC, the adjusted exchange rate of 9.3% in February 2011 might make the CPI increase by 1.2% in 2011), upward adjustment of wages and prices of some basic items (as calculated by NFSC, the upward adjustment of electricity prices at the beginning of 2011 (18%) in 2011 might cause the 0.75% increase to CPI, 20% petrol price increase in 2011 also boosted CPI up by another 0.5%).

Demand-pull inflation: the demand-pull inflation in Vietnam was expressed at the rapid increase in aggregate demand, reflected in two aspects:

First, the total money supply (M2) has maintained high growth rates (M2 rose 22.8% / year in the 2000-2005 period and 29.5% / year in 2006-2010), which has made “the financial depth”(calculated as the ratio of M2/GDP) jump from 97.6% in 2006 up to the level of 133.8% in 2010. In the 2007-2010 period, M2 increased by 2 times, while nominal GDP and real GDP increased only 1.73 times and 1.2 times respectively.

Second, the actual output in recent years has risen too high compared to its potential, thereby causing high inflation.

Some other specific factors such as the status of the overheating real estate market, stock market, the serious situation of dollarization and the abuse of gold which has made a large amount of social capital not flow in production; “inflation expectations” were much higher than other countries in the region, resulting in “inflation psychology”.

In sum, investment efficiency has reduced as ICOR rose; therefore, in efforts to maintain the economic growth, Vietnam was required to increase investment leading to increased aggregate demand, which was expressed through the expansion of M2 and credit excess, exceeding the absorption of capital in the economy, especially after the stimulus package.

This was the primary cause of inflation in Vietnam. Psychological factors of people, because of many different reasons, have become a very powerful catalyst to increase the level of inflation once there was a small or large agent (such as price adjustments, wage adjustments or others).

CPI does not exceed 10% in 2012

According to NFSC, as a result of the implementation of Resolution 11 in 2011 and orientation for further policy tightening (credit growth of about 15-17% in the whole year 2012), the impact of weak demand-pull inflation factor tends to decrease and stabilize in 2012; so that the inflation outlook in 2012 is forecast to be positive.

In addition, external factors such as world commodity prices declining (due to the decrease in demand for goods and raw materials in an awake of the risk of economic downturn) are also expected to have positive impacts to the control of inflation in Vietnam.

However, higher wages and increased prices of some basic commodities such as electricity, coal and others are said to be a negative factor to inflation in 2012. If the management of markets and operations of the macroeconomic policy are carried out reasonably, this will not cause the effect of “inflation expectations”.

As calculated by the NFSC, CPI in the first two quarters of 2012 – without regard to seasonal factors (time of the Lunar New Year) and assuming no upward adjustment in prices of basic commodities and exchange rate – will range from 3-4%. If adjusting up electricity prices by 20% in 2012, CPI may increase by extra 1.43% in 2012.

From the above analysis, NFSC said that inflationary pressures in 2012 will ease significantly in 2011 due to both demand pull and cost-push factors, showing positive signals.

NFSC forecast that CPI growth rate in 2012 will be around 9-10%. If international prices go down further, Vietnam’s CPI will likely be controlled at 8-9%. In 2013, inflation pressures are forecast to continue to decline, ranging from 6% to 7%. – Vietbiz24

Posted by VBN on Jan 10 2012. Filed under Economy News. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry