Vietnam's inflation

Vietnam's inflation is just the symptom

Vietnam needs to privatise to spur long-term growth.
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Shopping money in Vietnam
<div style="text-align: left;"> Shopping money in Vietnam </div>

This isn’t a news flash — everyone in Asia already knows Vietnam’s inflation redefines the word. But the numbers are worth highlighting: as of August, Vietnam’s consumer price index was up 23% from a year earlier. That’s the 12th consecutive monthly increase. 
And it is the highest rate of inflation in Asia.

It’s affecting the man on the street. According to the government’s General Statistics Office, food and drink prices rose 34% year on year in August.

Vietnam’s high inflation is symptomatic of supply-side issues as well as monetary constraints posed by the local currency peg to the US dollar.
 Food is still the largest contributor to inflation in Vietnam, accounting for 40% of the CPI basket, pointed out Sumit Dutta, Vietnam country head and CEO at HSBC. Food-price growth, particularly imported food products, are among the highest in the region. A shortage of power supply has also resulted in hikes in electricity and fuel prices in recent months, which is adding to local inflation. And pharmaceutical products are in short supply in Vietnam.
These factors all contribute to escalating supply-side inflationary pressures in Vietnam.

The government is now planning to lift the year-end inflation target to 17% from 15%. Johanna Chua, of Citi, pointed out that this in itself is higher than the inflation target set earlier this year at 12% and highlights the significant weakness in credibility of its inflation “targets”.

Yet, some specialists remain optimistic. “We are positive inflation will start to come down on a year-on-year basis from October, (so the worst is behind us) and recent fuel price cuts give us extra confidence this will be the case,” said Michel Tosto, head of institutional sales and brokerage at Viet Capital Securities.

Another sign that the government is taking inflation seriously is that on August 22, officials announced that minimum wages would increase as of October 1 in major cities to at least $95 a month. The rate will apply to both foreign-owned and Vietnamese firms, boosting the basic wage by 29% at overseas companies and 48% at domestic firms.

Of course, such a large increase could be a drain on employers, and that could be a drag on growth. In the first half of 2010 gross domestic product growth was 5.6% and Citi forecast in July that Vietnam’s growth will reach 5.9% this year, a hair below the country’s year-end target of 6%.

If growth slows, expect another policy change to get it back on track, which could just fuel more inflation. While policy responses are required and expected, what many bankers say the government really needs to do is get serious about privatisation.

Why Vietnam should privatise If companies were actually well managed they could spur growth, and policy moves would be tweaks, rather than wholesale efforts to change the course of a nation’s economy. The underlying premise here, of course, is that a privately run, or a publicly listed company would be more efficient and profitable than a state-owned company.

There is good reason to believe this, with the most prominent example of a mis-managed state-owned company, Vinashin, standing out as a lightning rod for criticism.

A state-run shipbuilding company Vinashin was the sole recipient of proceeds from the country’s maiden $750 million sovereign bond issue in October 2005. The group operated well in 2006-2007, signing contracts with a value of up to $6 billion, but it ran into trouble in 2008, partly because of the global financial crisis, but also because it invested in non-core businesses. It almost collapsed with debts of Vnd86 trillion ($4.3 billion) as of June 2010.

Several top executives were arrested for alleged mismanagement, and the government stepped in to restructure the company. The shipbuilder asked foreign lenders for a one-year extension after missing a $60 million principal payment on a $600 million syndicated loan, the company’s chairman Nguyen Ngoc Su said in February.

Next up, Vietnam National Coal Mineral Industries Group, or Vinacomin, had its long-term corporate credit rating cut to BB- from BB by Standard & Poor’s late last year, on the likelihood of low government support in the event of financial distress.

But despite these cases, there is no rush to privatise. State-owned enterprises continue to dominate the annual list of largest companies in Vietnam ­ from PetroVietnam, to the National Petroleum Corporation (Petrolimex), to Electricity of Vietnam (EVN), and the Vietnam Posts and Telecommunications Group (VNPT) — Vietnam’s major corporations are SOEs. And government-controlled companies in the nation account for 30% to 40% of loan books at state-run banks, according to Standard & Poor’s.

To be fair, with the currently volatile stock markets, the incentive to privatise isn’t strong at the moment. As of the end of August, the benchmark VN-Index had slipped 16% this year. And the Asian Development Bank said the Vietnamese stock market lost the most in the region, while other markets remained at above pre-crisis levels. But the government has been dragging its feet for years, rather than sticking to a plan of privatisation — it’s almost as if the government is trying to time the market for privatisations, which is silly because the process isn’t something that can be pushed through overnight.

”The government can’t act like day traders, when they’re dealing with major cornerstones of the economy,” quipped one banker.

Its latest move seems to be to regulate more.

In late July, the Ministry of Finance announced it plans to halve the amount of capital that SOEs can use to invest in non-core activities. State companies will be allowed to earmark only 15% of their capital for businesses beyond their main functions. Previously, SOEs could spend as much as 30% on non-core ventures — and many had dipped their toes in risky sectors including securities, real estate and insurance.

While such regulations may be needed, the reality is, until companies spur on the economy, Vietnam could continue to stagnate.

¬ Haymarket Media Limited. All rights reserved.
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