HSBC: Vientam inflation climbing toward 20%

Inflation in Vietnam continued to accelerate in May, now approaching levels seen in 2008. With underlying momentumshowing no signs of easing, the headline reading is set to hit 20% in coming months. Although the authorities have already tightened the fiscal purse-strings and delivered numerous rounds of interest rate hikes this year, more controlmeasures are expected in coming months as the battle against inflation seems far from over.

Facts

Inflation accelerated to 19.8% y-o-y in May from 17.5% in April, forming a nine-month streak. On a seasonally adjusted basis,the CPI climbed 2.1% m-o-m in May, after rising 3% in the previous month.

Food inflation quickened for the 12th straight month, hitting 28.3% y-o-y in May compared with 24.4% in the previous month.

Seasonally adjusted food prices were up 3% m-o-m in May, following a 3.8% increase in April.

Implications

Inflation remains the centre of attention in Vietnam. It has been more than three months since the Vietnamese authoritiesshifted their policy focus from boosting growth to curbing inflation and began tightening aggressively. Both fiscal andmonetary tools have been used, but thus far we have not seen much of an impact--clearly not on the inflation front at least.

Prices have picked up across the board in Vietnam, most notably in food and energy-related items. Although sequential growthof the seasonally adjusted CPI slowed in May, the pace was still uncomfortably fast. Moreover, one should bear in mind thatthe March and April readings were boosted by the double-digit hikes in electricity and fuel prices in late-February and late-March.

In short, inflationary pressures in Vietnam have yet to be contained. The headline number seems increasingly likely to surpass20% in coming months. The State Bank of Vietnam is therefore not expected to hold fire anytime soon.

Bottom line: Inflation accelerated for the ninth straight month in May and is still showing no signs of cooling. Further monetary tightening is expected in coming months.

hsbc

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