[Vnbiz] Vietnam's position on economic issues

Tue Jun 10 13:38:28 PDT 2008

Dear anhs Hao, Craig & All,

I think the government has done a number of things correctly.  Things may be
on the way up.  If we look at the May 08 statistics that I posted here a
week ago, things look good, except for the huge increase in food price,
which obviously were created from the long lines in front of rice stores in
May.
First, I think we need to think again about exactly what we are trying to
achieve.  Everyone said "inflation control."  Yes, but inflation is a
symptom of sickness.  It is not the sickness itself.  Say, when you have
high fever, obviously the immediately concern is reducing the fever.  But we
cannot lose sight of the fact that the fever is just the outward symptom.
We need to find out what is the disease that creates the fever, so that
long-term and permanent cure can be done properly.

Now let us repeat some of the "sickness causes" that create the inflation
fever:

1.  Oil price increase in the international market.
2.  Food price increase in the international market.
3.  The stock market crash.
4.  Fiscal deficit.
5.  Trade deficit.

The stock market crash is over (although stock price is still sliding).  So
we can just ingore it for now.

Oil and food price increases are outside causes.  We don't have much control
over them. So let's talk about them later.

What largely in our control is fiscal deficit and trade deficit.  On fiscal
deficit, the government has reported that they have met (10%) the budget-cut
target among government agencies (including provincial governments, I
think).

I hope that the government is seriously limiting import to cut out the trade
deficit.  But here is the problem on policy:  I have been recommending
allowing inflation to go its natural course (with a just bit of regulation
from the government) and using the inflation  pressure to aim for an
exchange rate favorable to export (and unfavorable to import).

I recommend gradually moving out of energy price control and subsidy, by
increasing gasoline price and then other energy products prices slowly (max
2% per month) until we are completely out of gasoline subsidy and price
control.  Then, with both gasoline subsidy cut and 10% budge cut, we may
completely solve the fiscal deficit.

The inflation pressure caused by gasoline price increase may create an
exchange rate favorable to our export (1 USD may be 20,000 VND for
example),   This exchange rate may not be good for import, but that we will
force us to limit import to the real necessities (not car, private jet,
fancy cell phones and ipods, expensive perfume and cosmetics, etc.).  When
export is increased and import decreased, we will solve the trade deficit
while increasing production.  Producing more, exporting more and buying
less--that will strengthen the economy and will bring inflation down
permanently, because we solve the problem at the level of the real strength
(or sickness) of the economy, and not just the outward inflation fever.

The Ministry of Finance obviously agrees with my postion that gasoline
subsidy and price control have to be out eventually and it is working on a
plan for that.  But, the SBV's position on an official exchange rate
that artificially keeps the USD high is going against my
recommendation.  This hurts export and helps import.  And I am disappointed
at the SBV.  May be the SBV is doing all it can to reduce inflation
pressure, preparing the way for MoF to start lifting gasoline price
control.  OK, increasing interest rate up to 16%, I can't see the logic
of it and can agree with it.  But the artificial exchange rate is crazy; it
brings a lot of damage and has zero effect on inflation control.

I think the SBV can achieve the same result of keeping import price low by
cutting import tax on necessity items, while stimulating export by the free
market exchange rate, and avoiding the distortion of the economy by a
distorted exchange rate.

About the food subsidy, I recommend to wait for several more months (5, 6
months) to see how things go.  If my guess is correct, the food market may
correct itself where it is distorted.  Craig, talks about  a bread shop cuts
its bread price by 1/3 recently.  That probably means that the price of
wheat flour was increased due to hoarding, but the hoarders have no outlet,
so they have to reduce the price back to normal.

The fact that rice price was increased for a couple of months and haven't
gone back down (although the government have rice subsidy and rice control)
tells me that rice is being smuggled out of the country regularly and the
current price is the free market price.  It means, the government is wasting
its money on rice subsidy for nothing.  But this would be a good thing,
because it makes the lifting of subsidy and price control on rice much
easier--price is already free market price; when subsidy is stopped, the
market wouldn't even feel a pinch.

For the stock market, my feeling is that the stock is going down just
because of pessimism, not because the stock price is over-valued.  As soon
as the info comes out that we have achieved trade balance for the month
(meaning, no more trade deficit for the month -- I mean the month, not the
the period from Jan. 1, 2008 to the present time) then the stock price will
start to increase slowly and steadily.

That would be my recommendation for  now.

Great day!

Hoanh

On Tue, Jun 10, 2008 at 12:57 PM, Quach Manh Hao <quachhao at gmail.com> wrote:

> [ Vietnam Business Forum ]
>
>
> Dear anh Hoanh, Craig and friends,
>
> After all what have been seen, what should be done?
> Cheers,
> Hao
> On Tue, Jun 10, 2008 at 12:34 PM, Tran Dinh Hoanh <tdhoanh at gmail.com>
> wrote:
>
>> [ Vietnam Business Forum ]
>>
>>
>> Dear and Craig & CACC,
>>
>> Of course "dollar trading has frozen" at the official rate.  No one trades
>> at that rate in the market (unless some foreign tourist sell his USD at a
>> gold shop at the official rate, because he has no idead on what else he can
>> do).
>>
>> But rest assured, brother, the dollar trade is alive and well.  At the
>> "free market" rate, mind you.  (Note: "Free market rate" now would be more
>> accurately called "black market rate").  However, since the market trade is
>> no longer "free" and has become "black," you can't see it, Craig.  You're
>> not in the loop.  But if you give 100 USD to any Vietnamese friend and ask
>> him to sell it for you at the market price, he would be able to do it for
>> you.  Even if he is not in the loop, he may know a friend who may know a
>> friend who is in the market loop.  Please keep in mind, the entire trade was
>> fully open and free several days ago. It can't disappear that fast.  It just
>> goes underground temporarily, until the SBV turns a blind eye and allows it
>> to become "free" again.
>>
>> I'm still digesting your info on food price.
>>
>> Have a great day!
>>
>> Hoanh
>>
>>
>>
>> --
>> Tran Dinh Hoanh, Esq., LLB, JD
>> Washington DC
>>
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-- 
Tran Dinh Hoanh, Esq., LLB, JD
Washington DC
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