Year-end inflation likely to reach 6.7 percent, Dragon says

August 4, 2009
A woman buys vegetables at a market in Ho Chi Minh City

Vietnam’s inflation rate, currently the lowest in more than five years, will probably accelerate to 6.7 percent by the end of 2009, fund manager Dragon Capital told investors in a weekly note.

Consumer prices rose 3.3 percent in July from a year earlier, the least since 2004. Inflation is likely to “bottom out” at about 2.5 percent in August before picking up, Ho Chi Minh City-based Dragon said.

Vietnamese inflation is “ready to take off again” and will probably climb to 9 percent by year end, causing central bank concern, HSBC Holdings Plc said last week. The range of estimates for the year-end rate is between 6 percent and 9 percent, Dragon said.

“Proponents of the higher estimate put a heavy weight on credit growth, which was fingered as the most likely culprit of the 2008 run in prices,” Dragon said.

Inflation reached 28.3 percent in August 2008, the fastest since at least 1992. The government said last month it is trying to keep inflation below 8 percent this year.

Dragon said that its estimate is toward the lower end of the range because the fund manager believes the link between lending and prices in Vietnam is not as strong as in countries with larger banking systems.

“Lending is mostly urban and the consumer price index is skewed toward food from the countryside: an unleveraged sector, where prices are largely determined on world markets,” Dragon said in the note. “At best, the influence of money hits local prices after a sizable time lag.”

Exchange rate

The 6.7 percent forecast may be revised upward if there is a “drastic” increase in commodity prices or if the exchange rate of the Vietnamese dong deteriorates, Dragon said.

Still, “the State Bank of Vietnam has the muscle to keep the currency stable and is improving day-to-day foreign exchange management,” Dragon said.

While the Vietnamese dong may continue to depreciate gradually, the central bank is focused on maintaining a stable currency to control inflation, Vinacapital Investment Management Ltd. said in a quarterly note.

Inflation will accelerate further in 2010, Dragon said, without giving a prediction for a figure.

“Price pressure is looming,” Dragon said. “Given the lag with which monetary policy operates, some modest near-term tightening might be prudent.”

The State Bank of Vietnam has held its benchmark interest rate at 7 percent since February. The central bank may increase the lending rate to 9 percent in the first half of 2010 to try to control inflation, HSBC said last month.

Source: Bloomberg, Thanh Nien

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