Vietnam Grapples with 27% Inflation and Collapsing Markets

Hanoi, 24 July 2008. July inflation figures have hit 27% in terms of year-on-year price growth. This is an increase of over 1% against June’s 26.8% inflation rate.

The Vietnamese economy was a darling of investors last year, estimated by the CIA World Factbook to have grown GDP by 8.5% last year. Both the stock and property markets boomed.

Hanoi, 24 July 2008. July inflation figures have hit 27% in terms of year-on-year price growth. This is an increase of over 1% against June’s 26.8% inflation rate.

The Vietnamese economy was a darling of investors last year, estimated by the CIA World Factbook to have grown GDP by 8.5% last year. Both the stock and property markets boomed.

Inflation hit 8.3% by the end of the year, and have been on a rampage since, driven on by rising oil and food prices. In effort to stem this growth, the government raised the bank interest rate to 14% and delayed expansive government spending that has also helped fuel price growth. Borrowing rates for enterprises have been as high as 21% this year, but exporters’ pressure on government to reduce these figures or see growth erode are being heard, and rates are starting to come down.

In March the government also froze the price of oil and other key commodities, but that proved to be too much of a strain on government coffers. The government raised the price of gasoline by 31% on the 21 July 2008, which has hit the country’s poor hard. This will have a further inflationary effect.

GDP growth has dropped to 6.5% in the first half of 2008, its lowest figure in seven years. The stock market has dropped 47% in value this year, and property prices are stagnating.

However there are some hopes that the runaway growth is being brought under control. Monthly inflation increases have dropped from 3.9% in May to 1.19% in July.

The Vietnamese government has announced that it will impose export duties on rice, in an effort to keep more rice in the domestic market and further help ease food price rises. The government aims to keep inflation to 25% by the end of the year.

Vietnam is the second largest exporter of rice after China, so this move is likely to increase rice prices for the rest of the region. The duties at current exchange rates amount to $176 per tonne, pushing up export prices to between $800 and $1,300 depending on the grain quality. Thai rice prices are expected to increase by as much as 10% as a result.

Chen Xiulian, EconomyWatch.com