What is your comment about the inflation rate in 2007 in comparison with previous years?

By the end of November 2007, CPI had increased by 9.45%, and it is likely to see the inflation increase by another 1.5% in December. In January and February 2008, CPI would rise by 2-3% as prices always go up during the Tet shopping season. The Taskforce on Domestic Market Regulation has estimated that the CPI may be two-digit for 2007, the highest ever level in the last 10 years. If so, the target to get the GDP growth rate higher than CPI increase would fail to reach.

What are the reasons behind such a high inflation rate? Do you think that it was partially because of the bad market regulation?

I agree that the world’s price increases have had an impact on the national economy. But a question has been raised that why other regional countries do not suffer as heavily as Vietnam, while they also have to bear the world’s price increases.

In fact, Vietnam benefits from crude oil prices, because it exports crude oil. Vietnam can produce and supply food and foodstuff, not relying on imports, but the prices of food and foodstuff products still saw the highest increases in the last time. I don’t think that it was because of the epidemics, as the epidemics in 2007 proved to be not as serious as the bird flu in 2006.

I personally think that one of the key reasons behind the high inflation rate is that Vietnam still cannot find the suitable treatment for the world’s price fluctuations. Vietnam still pursues the old way of thinking in regulating the domestic market, while ignoring the market rules. The petrol pricing is the typical example. The Government tries to apply an ‘open mechanism’ in importing and distributing petroleum. However, the ‘open mechanism’ has been applied for the distribution only, when the Government has licensed a lot of distributors. Meanwhile, the mechanism has not been applied for petrol import with only 10 importers licensed.

The Government’s agencies try to curb the price increases by inspecting production workshops, and order the producers not to raise selling prices. I think that the Government should not try to stabilize the market with administrative orders, it should apply market-based suitable solutions.

The bad monetary policy management was also another reason that generated the high inflation rate. While the dollar keeps devaluating in the world’s market, Vietnam still tries to stabilize the VND/US$ exchange rate and keep the basic VND interest rate unchanged. Such policies have helped turn Vietnam into the destination of the world’s investments. However, Vietnam does not have good policies to absorb the big foreign investment capital. As the result, the State Bank of Vietnam had to spent a lot of VND to purchase dollars, and the move has led to the ‘VND shortage fever’ on the inter-bank market as seen recently.

How would the high inflation affect the stock market?

The impacts can be seen in both aspects, positive and negative.

First, as the inflation rate is high, the VND will be less valuable, and investors will shift to hold real estate, gold or foreign currencies instead of VND. However, the three investment channels proved to be unsafe in the last time: real estate and gold prices fluctuated, while the dollar has been devaluating continuously. Therefore, investors now tend to inject money in securities and valuable papers, which may help keep the securities market more bustling.

Regarding the negative impact, high inflation may influence the monetary policy. In order to curb inflation, the central bank tries to tighten the monetary policy by requiring higher compulsory ratio on deposits, raising the basic interest rate, or limiting the loans for securities investments.

As for enterprises, the increased material prices and higher bank interest rates would make the production cost higher and make products less competitive.

Another negative impact is that the high inflation would make the high GDP growth rate nonsense, while discouraging investors.

But you have said that securities remain the attractive investment channel?

It is not as easy to invest in securities as it was in 2006. For example, if the inflation rate is 12%, the profit of 10% from securities investments would mean the loss. Meanwhile, the bank deposit interest rates are also lower than the inflation rates, with which depositors are incurring losses.

I think the government should think of developing the stock market and real estate markets so as to create effective investment channels. Once investors inject money in these markets, government will be able to reduce the cash volume in circulation. The government can also bring more choices to the investors by launching more valuable commodities to the stock market, especially the shares of big corporations through IPOs.

Source: DTCK.