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Goldman Sachs: high inflation the biggest problem now for Vietnam
The US-based leading bank Goldman Sachs, in the chapter about Vietnam of its latest Asia’s report, wrote that high inflation is now the biggest problem for Vietnam.
In April, Vietnam’s inflation rate was 21.4% compared to the same period of the last year. The high inflation rate is threatening the macroeconomic stability: it may affect foreign investment capital flow, and make the disbursement of foreign direct investment, the impetus for economic growth, interrupted.
Goldman Sachs predicted that Vietnam’s GDP growth rate may slow down this year and the next year with the forecast growth rates of 7.3% and 7.8%, respectively, lower than the previous figure of 8.5%.
Meanwhile, the inflation rate is forecast to stay firmly high, at 19% and 10%, respectively, for this year and the next year, much higher than 8.3% of 2007.
The sharp increase of money supply has been cited as the main reason behind the high inflation in Vietnam. The statistics of the Asian Development Bank (ADB) showed that the money supply in Vietnam soared from 34% in 2006 to 54% in 2007. Meanwhile, the credit growth rate soared from 29% to 54%.
In order to prevent the VND from appreciating against the greenback, the State Bank of Vietnam had to spend VND to buy dollars. Then it had to call back money from circulation by issuing compulsory bonds and raising the compulsory reserve ratio for deposits.
The report said that it is now a very important moment for Vietnamese policy makers to take suitable steps to help the national economy make ‘soft landing’.
The monetary policy must be the main tool that serves the fight against inflation nowadays.
Since June 2007, the State Bank of Vietnam has been taking a lot of measures to curb inflation. However, from now on, the central bank will not have many choices any more, while raising interest rates and controlling credit prove to be the most likely measures.
The move by the central bank on May 17 to remove the ceiling interest rate scheme was seen by Goldman Sachs as an active action to fight inflation.
Regarding the VND/US$ exchange rate, Goldman Sachs said that VND would keep devaluating against the greenback in the time to come.
The bank’s experts don’t think that the State Bank of Vietnam will revaluate the VND to curb inflation because of two reasons. First, the VND has not been much undervalued in comparison with the dollar. Second, the Government wants to encourage exports and foreign direct investment.
VNN
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