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Anti-inflation moves ‘are working,’ World Bank says
Vietnam’s moves to cut government spending and slow credit growth will help to ease the fastest inflation since at least 1992, according to the World Bank.
Evidence of an improvement in the economy is critical to preventing investors from fleeing Vietnamese dong-denominated assets, JPMorgan Chase & Co. said in a May 30 report.
Government reports last week showing accelerating inflation and a widening trade gap have damaged investor confidence in Vietnam.
Gains in consumer prices excluding food have slowed on a monthly basis, and the annual pace of growth in broad money supply has dropped sharply, according to a presentation by Martin Rama, the World Bank’s chief economist for Vietnam.
Import growth has also slowed in the second quarter, Rama said.
“Stabilization policies are working, even if this is hidden by time lags and high world prices of food,’’ Hanoi-based Rama said in the presentation.
“The government should therefore continue the implementation of its credit policy.’’
The government will extend current spending cuts and is telling banks to make fewer loans to slow year-on-year inflation from 25.2 percent last month, according to the report e-mailed by the World Bank’s Hanoi office.
The Southeast Asian nation is aiming for credit expansion of 30 percent this year, the World Bank said.
Growth was about 50 percent in 2007, according to the International Monetary Fund.
Policy makers are now also willing to accept slower economic expansion this year as they combat inflation, according to the World Bank.
The government has cut its growth target to 7 percent from as much as 9 percent.
Gross domestic product increased 8.5 percent in 2007.
Pressure on dong
The trade deficit and weakening capital inflows call for a depreciation of the Vietnamese dong, and authorities should also widen the band within which the currency is allowed to float, Rama said in his presentation.
The dong can currently move 1 percent on either side of a daily rate set by the central bank.
Morgan Stanley said in a May 28 research that the dong is poised to weaken in a manner similar to Thailand’s baht in 1997 because Vietnam’s current-account deficit may swell this year to an “unsustainably large’’ level.
While the “rapid” widening of Vietnam’s current-account gap is a concern, there is little risk of a currency crisis resulting from foreign investors selling the country’s stocks and bonds, Nomura Securities Co. said in a report dated June 2.
The dong “will probably instead come under only modest pressure in line with actual demand stemming from Vietnam’s trade deficit,’’ wrote Yuichi Izumi, a Tokyo-based economist at Nomura.
“Downward pressure on the dong could abate if a slower-growth policy by the government weighs on imports.’’
In addition to widening the dong’s band and maintaining its credit policies, Vietnam needs to stabilize its financial-services industry, the World Bank said.
Slower money supply is hurting banks with exposure to Vietnam’s real-estate market, Rama’s presentation said.
“If all the burden of adjustments falls on credit policy, the weakest banks will be vulnerable,’’ Rama said.
“Having weak banks quickly absorbed by stronger ones will preserve depositor confidence.’’
Thanhnien
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