Vietnam inflation hits 27 pct, exports boom

Vietnam's inflation climbed to 27% in July, possibly the highest in 17 years, highlighting price pressures that could intensify after this week's fuel price rise and adding to expectations for more rate rises.

Analysts said only a small part of Monday's 31% rise in petrol prices might be captured in July inflation data, making it likely the annual pace of growth in consumer prices will spike to 30% in August or September. At that rate, Viet Nam would have the highest inflation in Asia.

It also sets the scene for possibly another round of monetary tightening in the economy, where bank lending rates are already at 21% after three rate rises so far this year.

"One more rate rise will be needed," said ING Bank economist Tim Condon.

"They need to demonstrate that they are not indifferent to ever-accelerating inflation."

The government estimated consumer prices in July would be 27.04% higher than a year earlier, marking the ninth consecutive month of double-digit inflation and a rise in inflation from June's 26.8% reading. Historical monthly inflation data is not fully available, but the July rate could be the highest since 1991 when Viet Nam reported annual inflation of 67.5%.

Its estimates for trade, also released on Thursday, showed Vietnam continued to buck the Asian trend and was set for a lofty 37.7% jump in exports in the first seven months of 2008.

The trade deficit for the January-July period doubled to $15.01 billion, but more due to nearly 91% jump in the imports of expensive fuel in a nation heavily reliant on imported refined oil.

The widening trade deficit has taken its toll on the currency (VND) and forced the central bank to supply dollars as well as to come down heavily on speculators in the dong black market.

At one point in June, offshore investors were pricing in more than 30 percent depreciation in the dong within 12 months. The central bank's intervention and restrictions have brought the black and official markets closer this month, with interbank trades done between 16,500 and 16,850 in recent weeks.

The dong barely reacted to Thursday's data, while the main stock index .VNI extended a losing streak in place since the fuel price rise, taking its losses this week to 10 percent.

FOOD INFLATION

The government's General Statistics Office said average consumer prices in the first seven months would be 21.3% above the period a year earlier, rising faster than the average annual rise of 20.3% in the first half.

The office estimated food prices this month would jump 72.7% from July 2007. Food prices account for 42.8% of the price basket Viet Nam uses to calculate inflation.

Economists found some solace in the month-on-month figure, which showed the July price index may have risen just 1.1% from June, the smallest rise since October last year.

HSBC economist Robert Prior-Wandesforde said inflation still could cross 30% because of the rise in fuel costs.

"Our call remains that the peak will come before the end of 2008 and inflation should drop sharply next year, assuming there is no renewed spike in commodity prices and GDP growth continues to be lacklustre," he said in a note.

The data also revealed signs of improvement in the trade balance, with the July deficit at $800 million, far lower than levels of $2 billion to $3 billion seen in the first few months of the year.

Prior-Wandesforde said things seemed to be moving in the right direction, both on trade and inflation.

"Nevertheless, if the country is to regain the credibilitiy it has lost over recent months, the policy authorities must leave the market in no doubt that it is committed to single-digit inflation and a much lower external deficit," he wrote. (Reuters)