Vietnam’s National Financial Supervisory Commission
(NFSC) has recently announced its latest report on "Vietnam Economic
Outlook in 2012-2013", which mainly refers to developments of inflation in
the country.
According to NFSC, in the
period from 2006 to present, Vietnam's inflation has always stayed at 2-digit
levels (except 2009) with an average increase of 11.5% per year, more than 2
times against the level of 5.2% per year during 2001-2005.
Over the past time, inflation
has been a persistent problem and the most damage to Vietnam's economy as it
appeared more frequent, longer and stronger than other countries in the region
and the world.
Causes of inflation
The research of NFSC showed
that high inflation of the over past years has resulted from many factors,
including:
Imported inflation: Because
Vietnam’s economy has had close links with international markets, so price
shocks, especially the cost of fuel and food, have contributed to higher
consumer price index (CPI) in Vietnam. However, the influence of world prices
to domestic prices was part and not the determining factor to CPI increases.
The evidence is that many countries in the Asian region also suffered the
impact of international prices, but saw lower levels of inflation than in
Vietnam.
Cost-push inflation: inflation
in the country has been affected by cost-push, including the adjustment of
exchange rates (as calculated by NFSC, the adjusted exchange rate of 9.3% in
February 2011 might make the CPI increase by 1.2% in 2011), upward adjustment
of wages and prices of some basic items (as calculated by NFSC, the upward
adjustment of electricity prices at the beginning of 2011 (18%) in 2011 might
cause the 0.75% increase to CPI, 20% petrol price increase in 2011 also boosted
CPI up by another 0.5%).
Demand-pull inflation: the
demand-pull inflation in Vietnam was expressed at the rapid increase in
aggregate demand, reflected in two aspects:
First, the total money supply
(M2) has maintained high growth rates (M2 rose 22.8% / year in the 2000-2005
period and 29.5% / year in 2006-2010), which has made "the financial
depth"(calculated as the ratio of M2/GDP) jump from 97.6% in 2006 up to
the level of 133.8% in 2010. In the 2007-2010 period, M2 increased by 2 times,
while nominal GDP and real GDP increased only 1.73 times and 1.2 times
respectively.
Second, the actual output in
recent years has risen too high compared to its potential, thereby causing high
inflation.
Some other specific factors
such as the status of the overheating real estate market, stock market, the
serious situation of dollarization and the abuse of gold which has made a large
amount of social capital not flow in production; "inflation
expectations" were much higher than other countries in the region,
resulting in "inflation psychology".
In sum, investment efficiency
has reduced as ICOR rose; therefore, in efforts to maintain the economic
growth, Vietnam was required to increase investment leading to increased
aggregate demand, which was expressed through the expansion of M2 and credit
excess, exceeding the absorption of capital in the economy, especially after
the stimulus package.
This was the primary cause of
inflation in Vietnam. Psychological factors of people, because of many
different reasons, have become a very powerful catalyst to increase the level
of inflation once there was a small or large agent (such as price adjustments,
wage adjustments or others).
CPI does not exceed 10% in 2012
According to NFSC, as a result
of the implementation of Resolution 11 in 2011 and orientation for further
policy tightening (credit growth of about 15-17% in the whole year 2012), the
impact of weak demand-pull inflation factor tends to decrease and stabilize in
2012; so that the inflation outlook in 2012 is forecast to be positive.
In addition, external factors
such as world commodity prices declining (due to the decrease in demand for
goods and raw materials in an awake of the risk of economic downturn) are also
expected to have positive impacts to the control of inflation in Vietnam.
However, higher wages and
increased prices of some basic commodities such as electricity, coal and others
are said to be a negative factor to inflation in 2012. If the management of
markets and operations of the macroeconomic policy are carried out reasonably,
this will not cause the effect of "inflation expectations".
As calculated by the NFSC, CPI
in the first two quarters of 2012 - without regard to seasonal factors (time of
the Lunar New Year) and assuming no upward adjustment in prices of basic commodities
and exchange rate - will range from 3-4%. If adjusting up electricity prices by
20% in 2012, CPI may increase by extra 1.43% in 2012.
From the above analysis, NFSC
said that inflationary pressures in 2012 will ease significantly in 2011 due to
both demand pull and cost-push factors, showing positive signals.
NFSC forecast that CPI growth
rate in 2012 will be around 9-10%. If international prices go down further,
Vietnam's CPI will likely be controlled at 8-9%. In 2013, inflation pressures
are forecast to continue to decline, ranging from 6% to 7%.
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