[Vnbiz] Inflation Control

[Tran Dinh Hoanh]

Dear brothers Hao & Tuan and CACC,

Thanks for the quick responses, bros.  Let me capture the situation so far,
incorporating brother Hao's and brother Tuan's input into the large picture.

The Central Bank of Vietnam has pumped more Dong into the market (probably
by buying the UDS) to keep the USD dollar artificially high against the
Dong, hoping that it would help Vietnam export.

The additional Dong in circulation, in turn, has generated inflation (or at
least helped inflation).

To reduce the Dong circulation (to reduce the inflation pressure), the
Central Bank ordered commercial banks to buy treasury notes.  This forced
purchase of treasury notes has dried up the banks' liquidity (i.e. Dong).

The Central Bank has also increase interest rates on the Dong (in January of
this year) probably to "reduce the Dong circulation and therefore reduce
inflation pressure".  (Please read in Vietnamese
http://vnexpress.net/Vietnam/Kinh-doanh/2008/01/3B9FEEC3/ ).

Banks, having no money for lending, have reduced real estate loans.  This
may soon lead to a drought in the real estate market and the construction
industry.  (Please read in Vietnamese
http://vnexpress.net/Vietnam/Kinh-doanh/2008/02/3B9FF6D5/ )

Because of the shortage of the Dong and because the Central Banks has
increased interest rate on the Dong, banks have also increased interest
rates, which lead to many withdrawals by saving account holders to switch
banks, shopping for higher interest rate on their savings.  (Please read in
Vietnamese at http://vnexpress.net/Vietnam/Kinh-doanh/2008/02/3B9FF85C/ ).
OF course, higher inerest rate also hurts the real estate market and the
construction industry.


That is the situation so far.  The order of appearance I have up there is
roughly, but not strictly, the chronological order of all the events.  But I
think this point is not crucial, since all the events affect each other like
in a circle, regardless of what happens first.

So, what do we have now?

1.  We have higher interest rate, which may increase inflation ( and not
reduce inflation).  High interest rates usually bring higher prices because
(1) producers of products and services have to pay higher interests on their
operating loans and (2) psychologically, in the Vietnam I know, every time
people hear about "higher interest" they panic and increase prices.  (So the
theory that "higher interest rate may reduce the money circulation and
thefore reduce inflation" may not work at all in Vietnam).

2.  We have the Dong circulation dried up because of the forced purchase of
treasury notes.  This may dry up the real estate market and the construction
industry, which may precede a recession.  But the recession may increase
inflation (instead of reducing inflation as recession usually does), because
the volume of services and products (in real estate and construction
industry and related "beneficiary industries") will go down with more people
without jobs, while the money circulation is still the same.

3.  We have the Dong circulation essential the same (I am not sure the same
or a bit different), because the Dong pumped in by the Central Bank have
been absorbed by commercial banks when they were forced to buy treasury
notes.  So, the Dong value compared with the USD is essential the same.
Whatever the Dong's appreciation the Central Bank has achieved will
disappear immediately because the money exchange rate is extremely sensitive
to the supply and demand of the market.  You cannot fool the exchange market
at all.

4.  In the meantime, the inflation that was caused by the Central Bank's
pumping money into the market has occured and won't go away soon, because
inflation is less sensitive to the market and more sensitive to psychology.
Once inflation has already happened, it may take a while to disappear even
if we do all the right things.  Once sellers have increased their price
because of inflaion, they are very reluctant to go down.

5.  In addition, the "interest crisis" at the banks and lending institutions
may feed more into the inlfation psychology.  Actually if inflation
continues to rise, saving customers will withdraw their savings, not to
switch banks, but to buy gold to be safe.  Which wil make inflation much
worse.

Am I on the right track so far?

Hoanh
____________


2008/2/23 Quach Manh Hao <quachhao at gmail.com>:

> [ Vietnam Business Forum ]
>
>
> Anh Hoanh,
> It's a nice analysis. I think the government is now in a mess of policy
> making. They target low VND to encourage export (which is now -$20b) but had
> to buy USD to meet the demand of capital inflows. As the result, you've seen
> the story.
> What they are doing now is to try to sterilize, by asking credit
> institutions to buy VND20,000b treasury notes. This move is now causing
> "liquidity crisis" in banks. I think the goal of this move is not only for
> inflation control, but more importantly, for the fear of bubbles in real
> estates sector. Some banks have stopped lending to real estates. But this
> once again may cause unexpected/serious effect, that is if the sale of
> houses decreases, a lot of bank financed-home owners (speculators) must have
> to sell the houses at lower prices when refinance options are limiteds to
> meet debt obligations. This indeed would be a possibility of overall
> economic crisis. Hence, I think the government, on one hand, have sent a
> clear message that the monetary controls will be forced, but on the other
> hand, have to do this step by step to avoid a pain. That's what we saw last
> week when the SBV had to pump around VND33,000b to interbanks for short-term
> demands. Just an addition, that's also why we see the stock market was
> not the priority.
> Cheers,
> Hao
>
> 2008/2/23 Tran Dinh Hoanh <tdhoanh at gmail.com>:
>
> > [ Vietnam Business Forum ]
> >
> >
> >     Dear CACC,
> >
> > According to the following VNExpress article, the inflation rate
> > (increase in Consumer Price Index -- CPI) of January 2008 is 2.4% and
> > estimate inflation for February is about 3%, which could make more than 30%
> > for the entire year (if things keep going the same way).  That is very
> > scary.
> >
> > It seems Vietnam (with encouragement from ADB President) is using the
> > monetary policy to control inflation, by pumping more Vietnam dong into the
> > market to slow down the appreciation of the Dong against (the depreciation)
> > of the US dollar.  But how would this policy help slow down inflation?
> >
> > It seems the Central Bank of Vietnam may be focusing exclusively on
> > helping export, while intentionally increasing inflation in the
> > country.  The Dong value has been appreciating (i.e., increasing in
> > value) against the US dollar -- before Tet it was 1 USD for 16003 Dong,
> > after Tet 1 USD equals only 15890 Dong.  When the Dong increases its value,
> > that would hurt export.  Say, the price of a Vietnam-made shirt is 150,000
> > Dong.  If 1 USD  equals 20000 Dong, then the export price of the shirt is  5
> > USD.  But if 1 USD equals only 15000 Dong, then the export price of the
> > shirt increases to $7.5 USD.  In the latter case, our export will be less
> > competitive in the world market (because the price is higher).
> >
> > So governments have the incentive to keep the value of the domestic
> > money (the Dong here) low, to help export.  But by pumping the Dong into the
> > market to slow down the Dong's appreciation, that would create inflation,
> > because there are more Dong in circulation (for the same volume of products
> > and services).
> >
> > So the question here is:  Is the Central Bank of Vietnam hurting the
> > economy by helping create such a high inflation rate in the country?
> >
> > The second question is:  Even with that "self-inflicted wound," is the
> > Central Bank of Vietnam helping export at all?  The lower export price may
> > not mean much if domestic production cannot increase in volume fast enough
> > in response to the supposed "increase" in export demand from foreign
> > customers.  The question is:  Is there any concrete evidence that the
> > Central Bank is actually helping export (or everything is just a matter of
> > economic theory so far)?
> >
> > The third question is:  Even if the Central Bank's self-inflicted wound
> > may help export, would that "help" substantial enough to offset a spiral
> > inflation in the making?
> >
> > The fourth question is:  Monetary measures are usually temporary
> > measures, for immediate adjustments to the economy.  The permanent measure
> > has to occur at the structure of the economy.  How do we make our export
> > more competitive in the world market?  How we lower our production cost?
> > How do we make our factories more efficient?  How do we make our labor
> > forces more productive?  In other words, the permanent answers have to be in
> > microeconomics and industrial organization.
> >
> > Do we have any current analysis of Vietnam's competitive environment?
> >
> > Just some questions to invite you brothers and sisters to chip in.
> >
> > Have a great day!
> >
> > Hoanh
> >
> >
> >
> >
> > Tran Dinh Hoanh, Esq., LLB, JD
> > Washington DC
>
>
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