[Vnbiz] GS's Update on Vietnam

Thu May 22 18:08:54 PDT 2008

Dear anh Hoanh,
Thanks for trying to respond to my earlier question regarding your 
assertion that inflation can help Vietnam's exports.

You wrote:
"Also (not mentioned in the GS article), is the fact that your money (VND) 
tends to depreciate against the USD by the general rate of your inflation, 
say, 10% annually (and, of course, by the external rise or dive of the USD 
in the world market).  But the price increases in the various industries 
(which make up the general inlfation rate) are different: Say, food may 
rise 40% while labor may rise only 5% and some materials you use in your 
export may rise only 2%.  It means the VND may depreciate 10% against the 
USD (making your export product 10% cheaper) while the cost increase in 
your export product (due to inflation) is only 4%.  That makes your export 
product 6% cheaper (10% - 4% = 6%) and therefore 6% more competitive than 
your neighbors' export."

But your assertion that "your money (VND) tends to depreciate against the 
USD by the general rate of your inflation" is not a fact and is also 
incorrect.  That would only be the case if the VND exchange rate actually 
increases (more VND per USD) by the rate of inflation, which is not the 
case in reality.  Inflation of the local currency means it takes more of 
the VND to buy inputs to go into the goods to be exported.  With the 
exchange rate essentially unchanged, the VN exporter is spending more VND 
to export and get the same USD.  The pressure would be for the VN exporter 
to raise prices in USD terms.  There is no competitive advantages with the 
neighbors either because they too peg their currencies.

Well, at least you no longer insist on the stockmarket crash to be the 
main cause of inflation!

Cheers,
HPP

"Tran Dinh Hoanh" <tdhoanh at gmail.com> 
Sent by: vnbiz-bounces at mail.saigon.com
05/22/2008 06:59 PM
Please respond to
vnbiz at vietlinks.net

To
vnbiz at vietlinks.net
cc

Subject
Re: [Vnbiz] GS's Update on Vietnam

[ Vietnam Business Forum ]

Deae CACC,

Thanks brother Phong for posting this great article.  I would like to 
emphasize a couple of points in the article for our brothers/sisters out 
there:

Following is a good summary of the current problem and likely set of 
policy responses. I agree with it:
􀂃 With CPI inflation running at double-digit levels for the past 6 
months and still climbing, more investors have become worried about 
Vietnam's macro stability. Vietnam is clearly at a crucial stage of its 
cyclical management for inflation control and ensuring a soft landing of 
the economy. 
 􀂃 Among these policy options, we believe the central bank will likely 
rely more on higher interest rates and credit control to reduce domestic 
overheating pressures, while maintaining the fixed exchange rate with a 
moderate downward crawl against the USD in 2008–2009. 
 􀂃 With the government's policy priority firmly placed on inflation 
control over growth, we deem there is a greater probability that macro 
stability can be maintained in Vietnam. 
 􀂃 However, we still expect Vietnam's economic growth to moderate to 
below its potential level in the next two years, so that inflation will 
likely come down gradually towards early-2009. Our forecast for real GDP 
growth is 7.3% yoy for 2008 and 7.8% yoy in 2009, and our annual average 
CPI inflation forecasts are 19.0% yoy and 10.0% yoy for 2008 and 2009 
respectively. 
And here are the causes of inflation: 
"Contrary to some popular beliefs that the current inflation surge in 
Vietnam was caused by food supply shocks or rising imported food prices, 
we believe the main cause was the excessive monetary expansion Vietnam 
experienced since early-2007."   
I agree with the above assessment also. However, insted of the word "main 
cause" I would call it  "long term cause"--excessive monetary expansion 
Vietnam experienced.  Anh Craig has posted some good articles explaining 
how foreign money coming into the country may generate excessive liquidity 
in VND.  We have had all kinds of FDI, and in 2007 a lot of stock money, 
come in.   And of course, excessive credit growth migh also contribute to 
excessive VND liquidity.
And oil and food price increases added a lot of inflation pressure.  I 
would call that "immediate cause."
It means to address this inflation, we need to address both the monetary 
causes by monetary policy and other causes by administrative measures and 
fiscal policy.
Monetary policy: "Among these policy options, we believe the central bank 
will likely rely more on higher interest rates and credit control to 
reduce domestic overheating pressures."  This is being done in Vietnam and 
I agree that it is the very obvious measure to take.
Exchange rate, comparative inflation and export competitiveness:  The 
Goldman Sach report blends exchange rate, comparative inflation and export 
competitiveness in a very fluid discussion.  This is what I have meant 
previously when I said "using inflation to increase export 
competitiveness" and "letting inflation work for us instead of us working 
for inflation."  I can use simpler and longer business language to explain 
the point, but the economic language in the GS report would do the job: 
"Exchange rate
: We do not expect the central bank to break away from the current managed 
floating exchange rate regime in the near future. The SBV has long 
maintained a downward crawling peg against the USD, and recently slowed 
down the depreciation pace to less than 1% per year (see Exhibit 8)... 
"We expect the SBV to continue to prevent large upward movement of the VND 
preserve export competitiveness 
"In this context, we believe the SBV will likely maintain the fixed 
exchange rate with a moderate downward crawl against the USD in 2008–2009. 
Our 3, 6 and 12-month USD/VND forecasts are 16220, 16260 and 16400, 
implying a 1.5% depreciation in 12 months' time. 
"In our view, the central bank will unlikely rely on VND appreciation to 
control inflation
, for several reasons: first, the VND does not seem to be overly 
undervalued in real effective exchange rate terms that require an 
immediate correction. Despite the downward crawling in nominal terms 
against the USD, the VND has remained relatively stable in both the long 
term (compared to 1995) and short term (compared to 2005) on a 
multilateral basis in real terms (see Exhibit 9). 
"Although there is a risk that a managed currency may not fully 
demonstrate its fair value for a sustained period of time, the VND has 
clearly appreciated more in real terms than some other managed currencies 
such as the renminbi (CNY) and Singapore dollar (SGD) since 2003. This is 
because Vietnam has had higher inflation than its major trading partners 
while its currency depreciated in nominal terms. This also implies even if 
we assume a relatively rapid decline in Vietnam's inflation level, a 
nominal appreciation in the VND now could risk an overshoot in real terms 
relative to the currencies of Vietnam's major trading partners. 
"Secondly, the government has a strong tendency to preserve the 
competitiveness of its exports and FDI, especially given the potential 
impact on external demand from a US recession. Lastly, as the trade 
deficits continue to widen and international commodity prices still on the 
rise, currency appreciation is becoming more difficult to justify, 
especially given the potential risks in balance-of-payment difficulties in 
the near term. 
"Going forward, a downward crawl against the USD will likely relieve 
pressures on export competitiveness, especially in the case of a real 
exchange rate overshoot due to rising inflation. In addition, the central 
bank could consider increasing the trading band moderately to reduce its 
efforts in transaction clearance and deter firms from taking on unhedged 
FX liabilities. "
And when we talk about competition among nations exporting the same or 
similar produtcs to the same group of buying nations, if your inflation is 
higher than your neighbors' inflation, your money (VND) will depreciate 
against the USD (i.e. becomes cheap against the USD) more than your 
neighbors' money, this will make your export (paid in USD) cheaper than 
your neighbors' export.  Thus your export becomes more competitive.
Also (not mentioned in the GS article), is the fact that your money (VND) 
tends to depreciate against the USD by the general rate of your inflation, 
say, 10% annually (and, of course, by the external rise or dive of the USD 
in the world market).  But the price increases in the various industries 
(which make up the general inlfation rate) are different: Say, food may 
rise 40% while labor may rise only 5% and some materials you use in your 
export may rise only 2%.  It means the VND may depreciate 10% against the 
USD (making your export product 10% cheaper) while the cost increase in 
your export product (due to inflation) is only 4%.  That makes your export 
product 6% cheaper (10% - 4% = 6%) and therefore 6% more competitive than 
your neighbors' export.
Of course, there are many things going into an export product.  We can sit 
here and talk forever.  But the above is the fundamental competitive 
theory.  Business people in the export market understand exactly what I am 
talking about and know exactly what they can export profitably and what 
not.  Business people know how to make money, with high inflation or with 
low inflation, with crisis or without crisis.  They know the numbers.  As 
long as the government gives them a bit of support in the right direction, 
they will do well without anyone telling.  In addition to foreign exchange 
rate (keeping in mind comparative inflation rates between Vietnam and its 
neighbors), reducing export taxes would be good export support.
Hope this helps.  Have a good day.
Hoanh
_____________

On Wed, May 21, 2008 at 11:42 AM, <Hong-Phong_Pho at ita.doc.gov> wrote:
[ Vietnam Business Forum ]

... with an intelligent discussion on inflation and its cause.  HPP 

_______________________________________________
To subscribe/unsubscribe, please contact admins at
vnbizadmin at vietlinks.net
Info at http://mail.saigon.com/mailman/listinfo/vnbiz
Archive at http://groups.yahoo.com/group/vnbiz/
or http://groups-beta.google.com/group/VNBIZforum/
or http://mail.saigon.com/pipermail/vnbiz

-- 
Tran Dinh Hoanh, Esq., LLB, JD
Washington DC _______________________________________________
To subscribe/unsubscribe, please contact admins at
vnbizadmin at vietlinks.net
Info at http://mail.saigon.com/mailman/listinfo/vnbiz
Archive at http://groups.yahoo.com/group/vnbiz/
or http://groups-beta.google.com/group/VNBIZforum/
or http://mail.saigon.com/pipermail/vnbiz

-------------- next part --------------
An HTML attachment was scrubbed...
URL: http://mail.saigon.com/pipermail/vnbiz/attachments/20080522/ba42cf3d/attachment.html 