[Vnbiz] Inflation Control

[Tran Dinh Hoanh]

Dear CACC,

First, Marc, according to the media the 33 thousand billion dongs pumped in
by the State Bank is in the form of shortterm loans to commercial
banks.   My position at this point is that everything is not settled yet.
"Short-term" may be turned into long-term or permanent just in a second.
So, I am working on the assumption that when I see something I will know
that thing,

About the treasury notes, the latest news is that the State Bank my a delay
the date of selling it, because commercial banks may not have enough
liquidity for that.

Now let me continue my thinking-out-loud process.  Based on everything I
have seen so far, I've  come to the conclusion that the State Bank has NOT
YET focused its attention on the inflation issue.  Its priority was other
things: increasing bank required reserves for banking safety and stabilizing
the dollar exchange rate for export--withdrawing money and pumping it right
back, using technicality to achieve these two goals.  And the Bank wants to
be quiet about it, because stabilizing the USD exchange rate is against
the "official" policy of Vietnam to "peg the dong to the USD."

Please note that in the original plan (still good as of yesterday), the
State Bank was planning to withdraw 30 thousand billion dong and pumping
back out 33 thousand billion dong, an additional 3 thousand billion dong
into the market.  This is obviously an attempt to fuel inflation, not to
solve it.  Everything indicates that in its original plan, the State Bank
had no intention to deal with the inflation issue.  The Bank was more
focused on the depreciation of the VND to improve export.  And inflation
(which reduces the VND value) would actually help the Sate Bank in this
effort.

(So when people keep saying that the State Bank has done this and this to
solve inflation, but it can't do such a good job, blah blah, I think that is
a wrong and confusing conclusion that makes thing very confusing.  If we can
see the other focuses that the Bank has aimed at, not inflation, then
everything is very clear and makes no confusion).

And not only the State Bank, but probably the entire government's leadership
is not too worry about inflation yet, because yesterday they have allowed
gasoline prices to increase about 11.5%, a huge increase that would
definitely put a lot of upward pressure on inflation.  The government has
the power to determined gasoline prices at this point, but it has chosen to
allow the price to increase with the market in the middle of all this talk
about inflation.  It means only one thing, the government is not too worry
about inflation at this point.

Maybe the State Bank will think about inflation tomorrow, or maybe it
decides not to do anything with inflation yet, and takes a wait-and-see
attitude, waiting for other solutions to work first.  This bystander's
attitude at this time could be a very wise decision.  Because the State Bank
should not use monetary measures to fix inflation problems unless it
absolutely has to.  Monetary policies' most important goal is to keep
everything stable, meaning, "Don't do anything to the market unless you have
to." And monetary measures are used to affect the market only in urgent
cases.  Vietnam's current inflation, though a good cause for concern, is not
at the alarming level yet.

Higher interest and selling treasury bonds would be the typical respond to
inflation to reduce money circulation.  But high interest, if higher than
the current inflation rate, may be harmful to other major markets like
housing and construction.  Treasury bonds, to be able to sell on the market,
will also have to have competitive interest/discount rates.

But what could be some solutions other than monetary policy?

1.  One obvious solution from this discussion is that Vietnam may gain in
export due to its high inflation.  If all our neighbors are suffered because
the USD is losing its value, Vietnam's high inflation could be turned into
export advantage as the USD gains more advantage with a VND weaken severely
by high inflation.  This may turn our current trade deficit into huge trade
surplus, which eventually reduce inflation by several percentage points.  In
other words, we ride out the hard time and good time will come.
This strategy may work if Vietnam's production capacity is good enough
to satisfy all additional demands presumably increases (from a
weakened VND).   Looks like someone is confident that Vietnam can do that.

2.  The other solution (or non-solution) is that the inflation
pressure generated suddenly by the (half) collapse of the stock market may
be on the way out.  Bank interest is low, inflation is high, gold price is
on the rise, many investors will move money out of the banks into gold.  The
surplus money that puts inflationary pressure on the market will be gone.
Problem will be solved.

(And there will not be much more inflationary pressure coming from the stock
market because the stock market is about to stabilized.  I would guess if
the VNINDEX continues go down, it won't go down lower than 600 (which is 1/2
of its prime time value.  Just a psychological mark in my opinion.  Also,
that is just about the right value of the listed companies).

I wonder if the liquidity problem that the banks are facing is not the
result of investors' moving of moving out of the banks and into gold as I
mentioned about.

3.  The government also can help the trade balance by limiting some import
of luxury consumer items: perfume, gourmet foods, etc.  But not to
discriminate against import under WTO, then we can use a luxury sales tax on
luxury items (both domestic and import).  The effect will be more
prominent on import because presumably most luxury item comes from import.

4. The government can transfer profits from selling crude oil to offset high
price of import gasoline.  I have explained this earlier, this is not
"subsidy."  We need to treat oil industry as one entity and not two separate
entities, oil selling money should be used to offset oil buying.  This would
take much inflationary pressure away.

5.  Of course, the government can also use fiscal policy to
reduce inflation, by reducing government capital spending for now.

My main point is, I think the sudden increase in inflation is not to be
alarmed about.  It is mostly the temporary result of the stock market
"crash."  It will go away.  Vietnam still have inflation problem to work on,
but it is more normal inflation at a much lower rate than the current rate.

That would be my take on the curent situation (at least until we have more
news).  Still thinking.  Please kindly chip in.

Have a great day!

Hoanh








2008/2/26 Marc D <canadianinvietnam at yahoo.com>:

> [ Vietnam Business Forum ]
>
>
>  Did the State Bank actually withdraw the money (VND34Billion) out of the
> economy yet? I heard that, the reserve might have been put into effect by
> the banks, but the treasury note will only be issued on the 17th of March.
>
> Also, I've been hearing that the money the State Bank put back into the
> market (VND39Billion) is only a temporary move as the term is the 8th of
> March.
>
> Is this correct?
>
> HR
>
> ----- Original Message ----
> From: Tran Dinh Hoanh <tdhoanh at gmail.com>
> To: vnbiz at vietlinks.net
> Sent: Tuesday, February 26, 2008 10:56:01 AM
> Subject: Re: [Vnbiz] Inflation Control
>
> [ Vietnam Business Forum ]
>
>
>  Thanks for the note, Tu Anh.  I have below (right after this message) a
> good article written by anh Vu Quang Viet 3 days ago (the same day I posted
> my first message on this subject) (forwarded to me by anh Doan Viet Hung.
>  Thanks, Hung).  Anh Viet is a senior economist at the World Bank and an
> economic adviser for the government of Vietnam (for a long itme now).  This
> is a very good article, short and succint.
>
> Thanks brother Dan for the interview with anh Le Dang Doanh.
>
> I.   In this message I will go over a couple of points only.  The first
> point is that I have to agree with Tu Anh that the only sure fact is that
> the State Bank did pump more money into the market, but its intention is not
> as clear as I made it to be.  I was attributing to State Bank
> Dr. Cao Sy Kiem's statement, but technically he is not State Bank's
> governor, so his statements is not the Bank's statement.   But here we have
> an interesting point to analyze.  Probably not very crucial point in the
> whole thing, but I think it is beneficial to the entire analysis if we know
> what the State Bank's real intention is when it does a move.
>
> So please allow me to deviate into an investigative technique that I use
> into my legal work--the technique of interpreting evidence.  When we have
> some evidence that appears to be the stupid work of some stupid guy, my
> first assumption would be: "This guy may not be so stupid as he wants us to
> believe.  He may be a genius at work.  I just have to find his brilliant
> plan behind all this stupid-looking evidence."  Most of the time, that
> assumption turns out to be correct, because most people are too intelligent
> and not too stupid.
>  Many people appear to conclude many inconsistent moves by the State Bank
> recently as "the bank doesn't know what  it is doing"  or "It does one
> thing.  That wouldn't work.  It does another thing to fix."  In sum, the
> conclusion is not very favorable to the State Bank's intelligence.  But I am
> willing the bet that the minds at work at the State Bank may be much more
> intelligent than average people, and all the seemingly inconsistent moves
> may have a brilliant calculation of genius.  My number one rule:  Never
> under-estimate anyone, respect people's intelligence.
>
> So here is the summary of the State Bank's recent moves written by anh Vu
> Quang Viet. "Việc thiếu thanh khoản trong hệ thống ngân hàng đang trở thành
> khủng hoảng vì nhà nước Việt Nam đang thực hiện nhiều mục tiêu mâu thuẫn
> nhau, trong đó mục tiêu quyết liệt giảm lạm phát là mục tiêu mới. Trong tuần
> thứ 3 của tháng 2, mục tiêu này được thực hiện trong chớp mắt, có thể nói là
> "hơi quả quyết" nhưng thiếu cân nhắc kỹ, do đó nhanh chóng đưa tới hậu quả
> xấu, và đến cuối tuần mất ngay tính quả quyết ban đầu. Ngân hàng nhà nước
> tăng tỷ lệ dự trữ rút về khoảng 10 ngàn tỷ,  rồi tăng lãi suất một chút (vẫn
> còn quá thấp so với tốc độ lạm phát hiện nay) và tuần qua đòi hỏi các ngân
> hàng thương mại mua tín phiếu 20 ngàn tỷ đồng để rút về. Nhưng khi các ngân
> hàng thiếu thanh khoản, lãi suất liên ngân hàng vọt lên, Ngân hàng Nhà nước
> mất nhuệ khí, tung ra thị trường hơn 33 ngàn tỷ đồng vay ngắn hạn. Thế là
> xong một cuộc đánh trống bỏ dùi."
>
> Many other comments on the Internet is similar:  Basically the State Bank
> tried to reduce the money volume by 10 thousand billion dong by requiring
> commercial banks to increase its reserves and 20 thousand billion dong by
> requiring commercial banks to buy treasury notes.  Totally the State Bank
> withdrew from the market 30 thousand billion dong.  But these actions dried
> up the money at the commercial banks, so the State Bank had to correct its
> mistake by pumping back into the market 33 thousand billion dong by using
> the Dong to buy USD."  In short, "the State Bank withdrew 30 thousand
> billion dong, saw its mistake and immediately pumped roughly the same amount
> (33 thousand billion dong) bank.  The State Bank is just clumsy and not very
> competent in this matter."  Man, you guys are so nice and sweet, but so
> gullible.  Coincidences that show stupidity are usually not coincident, but
> brilliant.  What if someone at the State Bank decides that "We will increase
> the reserve of the commercial banks--to increase banking safety, increase
> treasury notes--that is good for the government treasury, and stop the slide
> of the USD to stabilize our export, all in one move--withdrawing money and
> pumping it right back, but through 3 different channels, and making it look
> like a quick mistake."
>
> Brothers and sisters, believe what you want, but my rule of thumb is that
> "Respect others' intelligence, and you will see better."  In addition to
> that investigative principle, I also have some evidence to back my
> theory up.   The first evidence is the absence of evidence:  The State Bank
> did not really tell the wrold why it did what. This may not mean much, but
> also may mean a lot.  And here are two quotes from the VNExpress article
> http://vnexpress.net/Vietnam/Kinh-doanh/2008/02/3B9FF85C/  "Một quan chức
> của Ngân hàng Nhà nước cho hay, diễn biến tỷ giá trong thời gian gần đây chủ
> yếu do cung cầu trên thị trường quyết định. Theo ông này, trong thời gian
> tới, *Ngân hàng Nhà nước vẫn duy trì các biện pháp ổn định tỷ giá,* không
> để giảm quá mạnh, song vẫn tuân theo diễn biến thực tế trên thị trường."
> (Hoanh's emphasis). "TS. Cao Kỹ Kiêm, thành viên Hội đồng Tài chính Tiền tệ
> quốc gia, cho rằng, nên duy trì biên độ tỷ giá ở mức 0,25-0,50% và có thể
> nhích thêm chút ít. Theo nguyên thống đốc Ngân hàng Nhà nước, VND sẽ vẫn
> tiếp tục đà tăng giá trước USD, *song tỷ giá nên được giữ ở mức trên
> 15.000 để tránh ảnh hưởng đến xuất khẩu cũng như tăng trưởng kinh tế nói
> chung." *(Hoanh's emphasis).  And a quote from anh Vu Quang Viet's
> article: "Giảm dòng chảy đầu tư nước ngoài bằng cách tăng hối suất (hối suất
> chính là giá nhằm quân bình cung cầu ngoại tệ trên thị trường trong nước).
> Điều này tât nhiên mâu thuẫn với *quyết định của nhà nước là giữ hối suất
> ổn định để phát triển xuất khẩu."  *(Hoanh's emphasis).
>
> Brothers and sisters, believe what you want.  But I seriously suggest that
> you believe that the State Bank, the financial leader of the nation, has
> brilliant minds at work, instead of thinking about the Bank as having only
> dim-witted people in there.
>
> 2.  The second point is about the stock market money. It is interesting
> that anh Vu Quang Viet talked about that money also: "Mở rộng cho đầu tư ở
> nước ngoài đặc biệt là vào thị trường tài chính (trong 7-9 tỷ chuyển vào
> Việt Nam năm 2007, theo tôi ước đoán, chỉ có 3 tỷ là vào đầu tư trực tiếp)
> do đó *tiền chuyển đổi để mua chứng khoán tất nhiên làm tăng khối lượng
> tiền tệ trong nền kinh tế, nhưng khác với đầu tư trực tiếp, không được các
> công ty bán ra chứng khoán, hoặc các đại gia nắm chứng khoán đầu tư vào sản
> xuất hàng hóa dịch vụ, mà chủ yếu chạy đuổi theo hàng hóa có sẵn, nhà đất và
> chứng khoán, làm toàn bộ trở nên bong bóng."  *(Hoanh's emphasis).  So anh
> Viet is talking about the inlfation pressure created by the moeny pumped
> into the stock market by foreign firm.
>
> But the domestic money pumped into the stock market is even bigger than
> foreign money.  And a huge chunk of domestic money was dormant money (in the
> form of gold and USD hoarding  at home).  This dormant money was pumped in
> the stock market, generated huge inflation pressure.
>
> I think the huge money pumped into the stock market was busy
> ballooning the stock market so it didn't generate a lot of inflation
> pressure in other markets at first, but when the stock price started to go
> down and the stock market started to shrink seriously around November,
> December 2007, the shrinking stock market forced real money to flee the
> stock  market into other markets, thus created huge inflationary pressure
> that showed up suddenly in Jan 2008.  (Tu Anh, I hope you will eventually
> agree with me.  Because this point is so clear to me like 2 + 2 is 4.  I
> can't be mistaken here).
>
> 3.  The third point is a question:  Everyone is talking about inflation,
> meaning, we have more money to buy in the market than services and products
> for sale.  But we also talk about the liquidity crisis at the banks, i.e.,
> banks has\ve no money to move around.  Does this make sense?  How is life
> inside the bank different from life outside the bank?  Tu Anh, you are so
> sharp.  Could you please help?  THanks a million.
>
> Have a great day!
>
> Hoanh
>
>
>
> --
> Tran Dinh Hoanh, Esq., LLB, JD
> Washington DC
>
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