HCMC - HSBC in its latest report on Vietnam economy issued on Tuesaday said the upside risks on inflation in Vietnam still remained despite the target to contain inflation at 8% this year is to be obtained.
The downward trend in year-on-year consumer price index (CPI) growth stretched into August as the headline inflation moderated for the fifth straight month, coming in at 8.18%, which was also the slowest pace since February, HSBC said.
The bank’s researcher explained that seasonally adjusted data show that inflationary pressures have in fact intensified in recent months, with the CPI up 0.5% month-on-month in August compared to a 0.1% rise in July. More worryingly, seasonally adjusted month-on-month food price inflation accelerated from 0.3% in July to 1.1% in August, the writer said.
“As a recent tropical storm damaged rice fields and crops, food prices may continue to rise in the coming months, making the Government’s task of keeping inflation in check more difficult,” said the report.
In addition, HSBC said that with total depreciation of about 10% on Vietnam dong since November last year, the Government should be mindful of strong import-led inflation.
Policymakers are going to implement price controls on selected items sold by foreign and private firms, which will be effective on October 1. However, the foreign bank’s researcher commented that this move may help control the pace of inflation, but it would certainly come with side effects, especially damage to business sentiment.
The foreign bank expected that curbing inflation is likely to remain an important item on the policy agenda in the near term.
“Not only does high inflation upset macro stability, it also weighs on the country’s economic prospects by hurting investor confidence,” HSBC said.
Meanwhile, although not the sole reason, high inflation is partly responsible for the low savings rate in Vietnam. The bank said that deposit rates in Vietnam tend to lag behind inflation, with real rates often in negative territory, which discourages savings.
“Low savings is in turn a concern, as investment still predominantly has to be funded by foreign sources, making the economy particularly vulnerable to external developments,” said the researcher.
HSBC report said that Vietnam’s trade and inflation concerns would not go away just yet. However, the Government seems keen on addressing existing economic shortcomings to improve the country’s growth prospects.
“The economy’s long-term outlook therefore remains positive so long as policymakers continue to prevent trade blowouts and inflation from running high, both of which remain the biggest risks facing Vietnam,” said the report.
