Rising inflation hurting Vietnam’s exports, says JPMorgan Chase

Rising inflation hurting Vietnam’s exports, says JPMorgan Chase (21/04/2008)
Vietnam’s accelerating inflation may hurt the country’s export growth, JPMorgan Chase & Co. said, as authorities allow the currency to weaken in a bid to boost shipments.

The Southeast Asian nation’s inflation rate rose to 19.4 percent year-on-year in March, the highest since 1995, driven by surging food prices.

The State Bank of Vietnam allowed the Vietnamese dong to rise in March to as strong as VND15,810 per dollar in an attempt to slow inflation, before allowing the currency to fall to as low as VND16,115 per dollar Thursday. “High inflation is eroding export competitiveness, despite government efforts to maintain a weak currency,’’ wrote Matt Hildebrandt, a Singapore-based economist at JPMorgan Chase, in a report dated last Friday and released earlier this week.

“Competitiveness depends on inflation differentials as well as nominal currency value,” said the report.

A move by the State Bank of Vietnam to buy dollars led to the “unusually large depreciation’’ of the Vietnamese dong toward the end of March, JPMorgan Chase said.

The decision to buy dollars in late March was part of a “highly confusing’’ government foreign-exchange policy, HSBC said in an April 2 note.

Vietnam is also facing a spiraling trade deficit, with the shortfall more than tripling through the first quarter, according to the General Statistics Office in Hanoi, the nation’s capital.

The most effective way for Vietnam to narrow its trade deficit is by increasing exports, said former Minister of Trade Truong Dinh Tuyen.

The US firm urges currency appreciation to counter price hikes and says supporting exporters by weakening the dong is “unlikely to be effective”

Exporters’ cry

“The Vietnamese authorities are not sure what they want to let happen with the exchange rate,’’ said Adam McCarty, Hanoi-based chief economist at Mekong Economics Ltd., speaking at a conference in HCMC April 8.

“They allowed it to strengthen somewhat, and then all the exporters screamed.’’

Vietnam’s seafood exporters were hurt by the stronger dong in the first quarter, the Vietnam Association of Seafood Exporters and Processors (VASEP) said in a note last month sent to the Ministry of Agriculture and Rural Development.

Seafood was Vietnam’s fourth-biggest export in the first quarter, after crude oil, garments, and shoes.

In spite of complaints from exporters, Vietnamese authorities “should as part of the anti-inflation policies allow the dong to appreciate against the dollar,’’ said McCarty.

“There’s still scope. Vietnam could go up to a 10 percent appreciation and still in relative terms be on a competitive par exchange rate-wise with other Asian exporting economies.’’

While the government cited the need to support exports as a primary motive for buying dollars and weakening the dong, the policy is “unlikely to be effective,’’ according to JPMorgan Chase.
“With inflation running well ahead of most trading partners, Vietnam’s real exchange rate has appreciated notably since late last year,’’ wrote JPMorgan Chase’s Hildebrandt.
“A better strategy would be to allow greater currency flexibility to help temper rising consumer prices rather than merely focusing on the dong’s value against the US dollar.’’

VIETNAM’S EXPORT SNAPSHOT

- The Ministry of Industry and Trade aims to attain export revenues of over US$58 billion this year, a 20-22 percent year-on-year increase.

- Crude oil, garments, footwear, electronics and computer components, woodwork, rice, coffee, rubber and mechanical products are set to attain high growth rates in 2008.

- In particular, handicraft products and electric and cable wire are expected to reach a record $1 billion in export revenues this year.

- Japan, the Association of Southeast Asian Nations (ASEAN), China, the Republic of Korea, the European Union (EU), the US and Australia are major importers of Vietnamese products.

- Exports to Africa and southwestern Asia are forecast to reach $2.8 billion this year, a jump of 54 percent from last year due to the regions’ stable trade policy and favorable market conditions.

- Vietnam moved past Chile, Colombia, the Philippines and Spain in 2007 to reach the list of the top 30 exporters to the US, driven by stronger sales of clothing, furniture, electrical equipment and coffee.

- The country’s shipments to the US, its top market, climbed 25 percent last year to $10.54 billion.

Source: Bloomberg