The economy expanded 6.9 percent on-year in the fourth quarter, up from a revised 6.04 percent in the third quarter, and grew 5.32 percent for the full year, according to figures released last week by the General Statistics Office in Hanoi. This marked a rebound after first-quarter expansion of 3.14 percent, the slowest on record.

The State Bank of Vietnam (SBV) will need to increase its benchmark interest rate again because of the strong fourth-quarter growth and accelerating inflation, wrote Johanna Chua, the Hong Kong-based head of Asian economic research at Citigroup.

The central bank rate was raised to 8 percent from 7 percent as of December 1.

Fourth-quarter economic growth was “much stronger than expected,” Chua wrote, in a note dated Monday that said Citigroup expected full-year growth of 4.7 percent, without giving its forecast for the past three months. Vietnam’s construction industry in particular was helped by “strong monetary and fiscal stimulus,” she said in the note.

The sub-category measuring construction grew 11.4 percent on-year in 2009, according to General Statistics Office figures. The industry’s “booming” growth in 2009 was driven by higher lending, a drop in construction costs and government infrastructure projects, according to a research note dated December 31 from Barclays Plc.

Policy bias shifted

Vietnam’s government has changed its policy focus to controlling inflation over further boosting an economic growth rate that is already accelerating, Barclays Plc said.

President Nguyen Minh Triet said in September that the government was focusing more on growth than on inflation. That bias has now reversed, given Vietnam’s “solid growth momentum,” according to Barclays.

Economic growth is “no longer an issue, and inflation concerns are building,” wrote Prakriti Sofat, a Singapore-based economist for Barclays Capital, in a research note. “The policy bias has shifted.”

The change will probably soon result in more interest-rate increases, Sofat wrote. “We look for a further 200 basis points of hikes in the first half of 2010,” which would push the benchmark rate to 10 percent.

Moves such as the interest-rate increase are “evidence of the State Bank of Vietnam wresting back control of macroeconomic policy,” DWS Vietnam Fund Ltd. said, in a monthly note released last week. The central bank is “prioritizing price stability ahead of rapid credit-fueled growth.”

Rising inflation

Credit growth accelerated to about 38 percent last year from 25 percent in 2008. Credit in Vietnam may grow 30 percent in 2010, a figure that would be consistent with an economic growth rate of about 6.5 percent, Sofat wrote.

Shipments of electronic products and garments are rebounding, and overall Vietnamese exports should benefit this year from a weaker exchange rate, Chua wrote.

The exchange rate of the Vietnamese dong against the dollar fell to 18,479 by the end of last year from 17,483 at the end of 2008. The currency’s weakness has probably already fed into inflation, Chua wrote. Prices rose 6.52 percent year-on-year in December, the fourth straight month in which the General Statistics Office has reported a higher figure.

“Strong fourth-quarter 2009 growth and rising inflation warrant more tightening,” Chua wrote. “Inflation risks are rising.”

In addition to raising its benchmark rate to as much as 9 percent, the central bank may also abolish or revise a regulation that places a ceiling on how much interest lenders can charge borrowers, she wrote.

Such a move would “further tighten monetary conditions,” she said in her note.

Source: Bloomberg