CPI deceleration: “completely normal”

“2.21 percent rise of consumer Price Index (CPI) of Vietnam in May is not unexpected. I can affirm that this situation is completely normal, in terms of both monthly figures and in yearly records.”

Financial expert- Mr Vu Dinh Anh affirmed so when asked whether it should be optimistic about the new evolutions of CPI, breaking the continuous upward trend earlier. “If you look at inflation over the months, such fluctuations are perfectly normal; a difference of one percent does not present any problem. Because in previous years, monthly figures differentiated from two percent to three percent even three percent to one percent … That is perfectly normal if you look at the numbers change.

What is important now is to determine the exact causes that bring about change, what the external and internal reasons are, so that we can make adjustments for the final goal of controlling the whole year’s inflation” said Mr Anh with the press.

But it can be understood, in an optimistic way, that the controlling solution that is already on the curb, or vice versa is not working?

The focus of the story now is not commenting of the top or bottom, being optimistic or pessimistic but to explain why CPI increased. If you explain the exact reasons then the next predictions could be accurate.

What is more important is to find the cause is to adjust the policies. If the decreased CPI in May is caused by the policy then in the following months, the impacts of policies could be better.

For example, if next month it drops to one percent then such a policy is in the right direction, secondly policy dosage is good enough, thirdly it is possible in five months to consider reversal policy to tighten down.

But the importance is whether or not this is the result of policy implementation? Or if there is other externality? If there is, it should be demonstrated and the authorities have to solve that.

Talking about effective policies to control inflation, the recent move of The State Bank was to buy US$1 billion, pushing a large amount of money in the commercial banking system, what are your comments?

The State Bank purchased US$ 1 billion, as a result of the previous story when commercial banks bought dollars and held in their system. Therefore the State Bank pressed on buying U.S. dollars.

Deposits in foreign currency were still higher than those in VND and foreign currency loans were not reported. Assuming the story of buying a US$1 billion was correct, it only changed the asset structure of commercial banks.

Considering at a certain angle it will affect inflation because the total payment means are transferred a part from the dollar to VND, the increased availability of VND means losing its value to dollar’s.

In principle, to see if it is net cash or not, they must see the M2 structure, including deposit money in the banking system and those outside the system. That point will affect the consumer price index.

Especially the net injection of the State Bank, recently announced to pump out 200 trillion VND, but attracted to the 164 trillion. It means that the net injection is only over 40 trillion.

If we assign this with the increased trade deficit in recent months then it also put a very high pressure on VND’s value?

In principle, this is correct. When trade deficit occurs, the foreign exchange market will be pressured from the supply side, causing foreign currencies to appreciate against the dong. That is buying US$1 billion can have two pressures to depreciate the dong.

Buying foreign currency, first is to create cash liquidity for the banking system through changes in asset structure of the system. In this context, banks lack the cash liquidity, through open market can sell dollars to the state bank.

This can be understood as the move to increase liquidity of the banking system but in contrast to have put pressure on inflation?

Exactly. Usually the overall liquidity means in the economy stays unchanged, but increased the amount of money is likely to cause the Dong to depreciate. Secondly this move affects the exchange rate, buying the dollar also lowers VND’s value

Another point is that inflation is the cause of cost-push. But the recent batch of goods is transferred to the market price mechanism, there is no tools left to control inflation. What do you think?

The main point is to raise prices rather than market. If we assume prices are unreasonable and are subject to adjustment then it is fine; but being reasonable or not is another story.

So that is to look ahead, inflation may have brighter future?

Better or not? How better is better? The whole story must be separated out. First, the causes of inflation must be answered clearly. Vietnam’s inflation lies in the way of Vietnam’s growth and huge investment.

Not until the problems of large-scale investment without economic efficiency, investing over 40 percent of GDP but resulting only 5-6 percent growth can be solved; does inflation exist. That is the root of the problem to be handled to end inflation completely.

It is a long-term problem, but in the short term inflation is also affected by shocks in the world such as gas and oil prices, or by the pressure of economic monopoly group who want to raise prices to adjust interests in production.

The combination of long-term problems with short-term shocks has pushed inflation to jump recently.

Another concern now is that the bank is under pressure of interest rates. The interest increases to curb credit growth, but rising interest rates but credit is not lower, inflation under doubled pressure of both amount and cost of VND. Thus, inflation in Vietnam is also a story of more expensive money.

VND is expensive but people still borrow and credit still grows. Production at this interest rate means bankrupt but short term investment is still profitable. The goal is to make production loans, thus there are conflicts. Tool of the central bank to raise interest rates to lower the credit is not working then they would have to find another tool.

To solve the problem of inflation in Vietnam, similarly with other countries, increasing by 5 percent was high, they must handle the root of the problem. But a further problem must be handled, is to create buffer to reduce external shocks, as more and more external shocks affect Vietnam but so far there has not been a solid solution.

If considering the price trends and the reasons for such impacts like this, what is your prediction for the CPI this year?

Over the same period, CPI will also have to pass 20 percent; if in September it increases by less than 1.31percent, this mark will go down. Now, this criterion is already approximately 20 percent then within the next 3 months it will be up to 22-23 percent, or higher at 25 percent. Then it will be similar to the situation in 2008 where at the end of the year it will be about 20 percent. – VCCI

Tags: Vietnam economic, Vietnam economic growth, Vietnam economy, Vietnam economy 2011