Do you think inflation has crossed a safe threshold? What is Standard Chartered Bank’s forecast for 2007 inflation?

There are different explanations for the inflation numbers. What I myself tend to subscribe to is that this is a high growth economy that is very cheap in terms of costs and factory prices. So, your production growth has been relatively high either because of a low base or lots of improvements being made through reform, through investments over the years.

It is not too surprising then to see inflation at this level, and if you take into account the quality of data itself there are two different issues here: one is to what extent you think 8% is really 8%.

Secondly, different groups of people will have different feelings about inflation. It is normal that different people will tell you that what the Government reports is underestimated, which is good in the sense that if the data’s right those people belong to a privileged part of the economy.

Normally when an economy is growing, people in a higher income group or a preferential group may feel inflation pressures more.

What you are given [in the consumer price index, a key measure of inflation] is a natural benchmark that averages out over several income brackets.

For developing economies in general, the low income group accounts for a large part of the population, so their consumption basket is very different.

When the economy grows fast, high end products which are in stronger demand by higher income groups grow faster [in terms of price]. So, they will feel the impact of inflation much more than normal, particularly in cities...

If you look at an economy growing at 8-9% with a consistent level of inflation over the last two years of around 8%, the current inflation figure is not excessive.

Standard Chartered Bank’s inflation forecast for the year is 8%, up from a previous estimate of 7.6%. Inflation for 2008 is estimated at 8.5%, up from 8.2%, due to more risks to food and energy prices.

Some central bank and National Assembly officials have recommended that the country ends its policy of keeping inflation below economic growth?

The policy itself is interesting, but in an indirect way if we expect real growth rate to be somewhere in the 7-10% range, which seems to be where we are at the moment, it implies our inflation should be below that level.

Whether or not that level is desirable, I think depends on in which part of the [monetary] cycle we are. Definitely, we do not want a higher inflation number. Anything in double digits, we should need to be more careful.

In a way you can argue this policy is not robustly constructed, but it has an impact of setting a sort of ceiling on the kind of inflation the Government is willing to tolerate or allow. At least it is something, which better than nothing...

I will not say Vietnam’s inflation rate is safe or not, but that everything is all right.

It seems the central bank has not decided on where, when, how they plan to buy US dollars, which has caused the Vietnamese dong to appreciate. What are your opinions on this and its impact on inflation?

I definitely think monetary management or capital flow investment management pressures inflation. But as I said, we should not consider inflation on a single factor, for instance food prices or import prices. You may argue that to use stronger monetary management may help to some extent, but you don’t know how efficient it is.

On the other hand, tightening money supply policy cannot help you produce more food, so there are different sources of inflation which require different responses in monetary management.

What I can say is strong capital inflows in terms of direct investments, remittances and portfolio investments is something that the State Bank of Viet Nam should work towards to make sure it will not generate excessive liquidity in the system.

From what we understand, capital inflow so far have been largely sterilised by the State Bank already. Of course, there is still concern that if the inflow gets larger the State Bank will not be able to limit liquidity because they have limited tools to sterilise paper...

There is still more to do, but so far this year foreign capital inflows have been largely sterilised by the State Bank. I do not take foreign capital inflows as a major factor behind inflation.

More likely, inflation pressure comes from factors that we cannot control.

What do you think of Vietnam’s exchange rate policy?

I guess we have to think through the basic principles behind reserve management. Increasingly, you see other central banks, particularly those with mega-sized reserves, trying to set aside a part of those reserves for reciprocation as well as for returns and strategic reasons.

China, for example, set up a US$200bil fund to try and increase the returns on the reserves as well as diversify the risk from currency as well as different portfolios, and also to build up strategic reserves in terms of natural resources or corporate holdings for the country’s long-term development.

I think that could be something this country will move toward in the longer run, but in the immediate future I think the bulk of the reserve will still be for liquidity management purposes and volatility management purposes, which means that this is money set aside to defend or support your external payment position, your currency stability, and to cover whatever payment or unexpected volatility arise in the financial system. For those purposes, you have two requirements: one is liquidity, and two is liability management.

You have to look at what are your liabilities and assets. If your liability is in US dollars while you pump most of your currency into euros, in times of stress you might not have enough US dollars to make payments, and that is the last thing you want...

The first criteria and most important criteria is to make sure that you are safe, that when there is stress this asset can be converted to cover your liability. In that sense, there is a limit to how much you can diversify. Policies shouldn’t be dictated so much by how exchange rates fluctuate on the world market, but more on your own situation.

But some sort of diversification is the general global trend, and not just because people believe the US dollar will weaken – we take a slightly different view in this regard – but also because the dollar’s role in international finance is declining.

Source: Viet Nam News.