Vietnam is exposing signals of an inflation shock, Merrill Lynch said in a report entitled “Vietnam: Anatomy of an inflation shock.”
First, ML indicates that the fast rising inflation makes the central bank to have strong reaction by tightening monetary policy.
Second, tight liquidity and high interest rates worsen economic growth outlook.
Third, prices in the stock market and real estate market have great impacts of sentiment.
Fourth, domestic currency may appreciate if the monetary policy is tightened step by step, or depreciate sharply if economic recession takes place and foreign capital flows out.
The inflationary situation in Vietnam is an example of inflation shock, ML said, like China in the spring of 2004 and autumn of 2007, India in early 2008 and Indonesia in summer 2005.
Vietnam economy, like China, which is new member of WTO, has high growth thanks to export and investment. However, Vietnam finds more difficult in inflation battle, because the country receives an amount of capital larger than its absorbability.
Merrill Lynch says that Vietnam is also different from other Asian countries in fighting inflation, as the country has current account deficit, foreign capital inflows into Vietnam last year account for a big amount of GDP, and it has low reserves of foreign currency, big foreign debts and unsound state budget.
The report says that Vietnam is only a tiny economy in Asia because its US$70 billion GDP is equivalent to 1 per cent of total GDP of Asia, excluding Japan.
Despite impressive high economic growth in recent years, Vietnam is influenced by its fast success. (VnEconomy)
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