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Vietnam warned of inflation and trade deficit   2010-03-16 - VietNamNet/SGT

The trade deficit is likely to prompt a further fall of the Vietnamese dong this year while food, housing and transport costs are leading inflation higher, according to a Standard Chartered Bank report.

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The report on Vietnam’s economy by the bank’s research department underlines the deficit was at its worst in quarter two of 2008, when the 12-month rolling sum stood at almost US$20 billion.

“Back then, several one-off factors explained the surge in the trade deficit. In particular, higher commodity prices led to stockpiling of steel products and rising net imports of oil and petroleum products,” says the report.

The research team led by Tai Hui, regional head of research in South East Asia, noted that as of January 2010, the 12-month rolling sum of Vietnam’s trade deficit reached US$14 billion, and the deficit is on a widening trend.

Tai Hui said commodity price increases were much less dramatic in late 2009 and January 2010, so they do not provide a satisfactory explanation for the recent widening of the trade deficit.

“In our view, there is a more straightforward explanation: the relatively high speed of domestic economic growth compared with global growth,” he said in the report.

According to what the research team reported, during the three-month period from November 2009 to January 2010, Vietnam’s exports grew by 17.3% year-on-year, but its imports expanded by a staggering 52.2%.

Demand from the U.S., Vietnam’s largest overseas market, is still sluggish; exports to the U.S. fell by 9.2% year-on-year in value terms in December 2009.

On a more positive note, Vietnam’s exports to China have skyrocketed in recent months, with growth averaging 63% year-on-year between November 2009 and January 2010.

China has been a key factor supporting Vietnam’s export growth in the absence of support from the West, says the report.

In the meantime, imports have been surging, and the widening of the trade deficit in November and December 2009 could be attributed to a rapid rise in imports of machinery and spare parts, reflecting strong investment growth.

Another factor was that a pick-up in automobile imports led the trade deficit to widen.

However, despite the opening of the first oil refinery Dung Quat in February 2009, exports of crude oil and imports of refined petroleum products remained roughly in balance, as opposed to Vietnam being a net exporter in this category.

“This again reflects Vietnam’s rapid and energy-intensive economic development.

The good news is that as exports gradually recover, Vietnam’s trade deficit should narrow,” said Tai Hui. “However, the country’s external trade position is still vulnerable to a surge in commodity prices.”

The researchers expressed concern that year-on-year inflation returned to above 7% in December 2009 and January 2010. They said month-on-month inflation has been above 1% for two consecutive months for the first time since the summer of 2008.

Food, transport and housing prices have been the main drivers of the pick-up in inflation.

The State Bank of Vietnam (SBV) has kept its policy rate steady since the turn of the year but opted to allow the Vietnamese dong (VND) to go down by 3.4% against the U.S. dollar on February 10 after a 5% depreciation in November 2009.

That was also a key factor for the Standard Chartered economists to expect the dong to depreciate further in the months ahead, as the trade deficit remains a vulnerability – notwithstanding the inflationary pressure facing the economy.

They strongly recommended Vietnam should improve foreign direct investment (FDI) and overseas workers’ remittances that should lend stability to Vietnam’s external payments position over time.

Tai Hui and his team wrote in the report that they saw inflation risks remaining on the upside and that electricity tariff rises by 6.8% to 10.7% later this year on higher coal prices were expected to add 0.23-0.36 percentage point to headline inflation.

The dong decline could also put upward pressure on import prices, they said, and inflation might exceed 10% by year-end and average 8.9% in 2010.



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