Anti-inflation measures confuse Vietnam markets
Even with the big share losses and confusion over monetary policy, economists and investors consistently say they believe in the potential of Vietnam's economy, which is growing at 8% a year and attracting record levels of foreign investment. (Additional reporting by Nguyen Nhat Lam in Hanoi and Vidya Ranganathan in Singapore, Editing by Alan Raybould) -Hanoi, March 5 -The Vietnamese government announced a slew of measures designed to fight double-digit inflation, but investors and analysts said they needed more clarity on the policies and when they would be implemented.
A statement posted late on Tuesday on the government's Web site listed more than 10 measures to fight inflation and boost share markets, including a widening of the dollar/dong trading band.
But two officials at the central bank said on Wednesday it had no plans for an imminent change to its dollar/dong trading band policy, under which the currency is allowed to move 0.75% either side of an official rate set each day.
"We can say that the plus or minus 2% mentioned in the directive is for long-term dong movement, not for intraday transaction," said one State Bank of Vietnam official, who asked not to be identified.
The officials in the central bank foreign exchange department said there would be a clarification on the trading band but it needed to be approved by prime minister Nguyen Tan Dung, who is travelling in Europe.
"The market is confused with this policy thing and people are waiting to see a more clear explanation before trading the dong again," said a currency trader at a foreign bank who asked not to be identified.
Until recently Vietnam pursued a policy of pushing the dong down gradually against the dollar to bolster export competitiveness, but some economists argued it should be allowed to appreciate in order to fight inflation, which hit 15.7% in February compared with a year before.
The currency started rising towards the end of last year, a trend underpinned this year by central bank measures to tighten monetary conditions.
Economists, share traders and currency analysts say the government needs to spell out its policies clearly.
"The vagueness is negative to investor confidence," said Prakriti Sofat, Asian economics analyst at HSBC in Singapore. "A lack of trust could develop if the government does not clarify where they are going. This could be causing some unnecessary market volatility."
The Ho Chi Minh Stock Exchange.VNI sank more than 4% on Wednesday as the proposed measures failed to restore confidence in the free-falling market.
It has slumped 37% this year after local retail investors baled out following a series of central bank directives to banks that dried up liquidity.
Tim Condon, chief Asian economist at ING, said he believed monetary tightening would work eventually.
"Inflation pressures will come down. What financial market participants are worried about, if you look at the equity markets, is that they work too well and that you get a lot of deflation in stock prices before you see the impact on CPI," he said. Tuesday's statement also called for the central bank to raise banks' compulsory reserves again, without giving a time frame.
The central bank raised compulsory reserves on February 1 to 11% of banks' dollar and dong deposits of up to 12 months from 10%.
Even with the big share losses and confusion over monetary policy, economists and investors consistently say they believe in the potential of Vietnam's economy, which is growing at 8% a year and attracting record levels of foreign investment.
Reuters - March 7, 2008.
Vietnam to widen dong trading band to slow inflation
Vietnam plans to widen the dong's trading band to 2%, giving more scope for the currency to gain and slow the fastest inflation in more than 12 years.
Deputy prime minister Nguyen Sinh Hung told the central bank to widen the band for the dong from 0.75%, according to a directive posted on the cabinet's Web site late yesterday.
Increases in global prices quickened inflation to 15.7% in February from a year earlier. Allowing the dong to strengthen would reduce the cost of importing dairy products, cooking oils and petroleum goods.
``Inflation is generally a problem in Vietnam, but it's specifically a problem in food prices, especially imported food, and oil prices,'' said Matthew Hildebrandt, an economist at JPMorgan Chase Bank in Singapore. ``You need to find a way to limit the impact from imported goods.''
Consumer prices jumped about 6% in January and February alone, ``posing great challenges'' for the Vietnamese economy, according to the statement. ``Given global prices are set to increase more, this may have a strong impact on Vietnam's socio-economic development,'' it said.
The timing of the change hasn't been decided yet, Nguyen Van Giau, governor of the State Bank of Vietnam, said by telephone today from Hanoi. The bank has to discuss implementing the directive with the government, he said.
Increases in prices of commodities and energy have driven China's inflation to 7.1%, an 11-year high, and gains in Indonesia's consumer prices to 7.4%, the most in 16 months. Both currencies though have allowed their currencies to appreciate, in contrast with Vietnam, which has a policy of keeping the dong weak to make exports competitive.
The dong closed at 15,922 against the dollar as of 5:30 pm. in Hanoi, the highest since April 4, 2006. Vietnam has allowed the currency to gain 2% in the past six months. The State Bank of Vietnam sets a daily dong rate and allows the currency to trade a fixed amount on either side of that.
The central bank last widened the dong's trading band in December, allowing the currency to end an 11-year run of depreciation.
Vietnam's year-on-year inflation accelerated to the most since September 1995 last month, after quickening to 14.11% in January. Imports rose 64% last month, with a 121% increase in milk and dairy products, and a 157% surge in fat and oil imports.
JPMorgan Chase Bank expects inflation to average 16.1% this year, compared with around 8.5% in 2007, and the dong to strengthen about 1%, according to Hildebrandt.
Deputy prime minister Hung, acting on behalf of prime minister Nguyen Tan Dung who is visiting the UK, also asked the State Bank to consider increasing the amount of reserves that banks have to set aside to reduce liquidity in the economy.
The central bank on January 16 ordered banks to raise the amount of money they keep on reserve to 11% from 10%, the first increase since June 2007.
Vietnam's benchmark bonds declined, pushing up the yield on the five-year note the most in almost two weeks, on speculation banks will have less money available to buy debt. The yield on the benchmark five-year note rose 5 basis points, or 0.05 percentage point, to 8.65%, according to a daily fixing price from 10 banks.
Bloomberg - March 7, 2008.