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Vietnam Control Inflation, Avoid Broader Economic Fallout

FILE - An investor looks at a stock market screen at a securities company in Hanoi, Vietnam, July 20, 2015.
FILE - An investor looks at a stock market screen at a securities company in Hanoi, Vietnam, July 20, 2015.

Vietnam is trying to get a grip on inflation that might otherwise threaten its quick economic growth again as it did a decade ago, analysts and domestic media say.

Consumer prices in June were 4.67 percent higher than in the same month last year following an increase of 3.29 percent in the first half of 2018, the Vietnamese General Statistics Office said. The legislature had set a target of no more than 4 percent.

Prices of commodities, including crude oil, are contributing heavily to inflation, and a fuel tax proposed for October would exacerbate it, the VnExpress International news website said. Currency weakness, a rising middle class and credit growth are further raising prices.

“I think generally the trend has been upward and that’s just a result of increased spending power on behalf of Vietnamese people,” said Maxfield Brown, senior associate with the business consultancy Dezan Shira & Associates in Ho Chi Minh City.

Inflation of more than 20 percent in 2008 throttled Vietnamese economic growth over the following three years. The target of 4 percent inflation is aimed at stopping a repeat.

“It’s something to watch,” Brown said. “Obviously, if things go way, way high, then that’s a problem. But that’s not what’s happening right now.”

Noticeable change in prices

Consumers notice the higher fuel prices when pumping gas for cars and scooters. Some also found that rice prices didn’t fall as expected after a 10 percent hike before the major annual Tet holiday in February this year, said Vietnamese consumer Phuong Hong, communications director with a tech firm in Ho Chi Minh City.

Electricity costs more every year, she added, while salaries do not necessarily help common people afford the increases.

“Normally the rate of price rising is always too much and always higher than the rate we’ve got from salary support,” she said.

Vietnam raised its minimum wage 6.5 percent this year with plans for another 5.3 percent in 2019. About a third of the 93 million Vietnamese will be middle-class or above by 2020, the Boston Consulting Group estimates. Rising wealth reflects creation of jobs, a function of economic growth driven by manufacturing.

The country faces pressure to keep wages in check as low labor costs drive foreign investors to the country from around Asia, as well as a few giant American firms.

Vietnam’s GDP in the first half of this year grew about 7 percent after several years near 6 percent. The Asian Development Bank estimates 7.1 percent growth for the full year.

Risk of fallout, government follow-up

Last year “marked a breakthrough” in government work to manage prices of electricity, fuel, formula milk and healthcare fees, VnExpress International said.

Government agencies “should closely monitor price movements,” take a lead in readying goods for Tet so prices stay controlled and “set out rational measures” to stabilize the market, the Communist Party of Vietnam’s website Nhan Dan said. Last month legislators were reexamining the fuel tax.

Officials are on guard for a relapse of inflation in 2008, which followed an influx of foreign currency into the export-reliant country due to the demand for imports, analysts say. Inflation then rippled into the broader economy until 2011.

Prices have been rising now since 2015.

The inflation of 2008 prompted hundreds of wildcat labor strikes by workers who wanted more pay. Prices, strikes and a devalued Vietnamese currency then took the annual economic growth rate down to 5.3 percent before it began to rebound.

Those pressures sparked a fall in pledges for foreign direct investment – the likes of factories that make garments, furniture and car parts. Pledges fell in 2011 to $14.7 billion, from $19.9 billion in 2010, and the amount of actual foreign direct investment plummeted 35 percent that year.

Vietnam’s growth is one of the fastest in Asia today.

Analysts expect Vietnam to weather the current price hikes without the blowup of 10 years ago but warn against currency deflation that has swept other parts of Asia – partly because of the Sino-U.S. trade war. Weaker currencies usually push prices up.

“At the moment we don’t expect really a ramp-up of inflationary pressure,” said Marie Diron, managing director with Moody’s Investors Service in Singapore. But, she said, “with the weakening of the currency, inflation is likely to go up a bit further in Vietnam and other countries.”