Consumer prices rose 9.66 percent in October from the same month a year earlier, according to figures released by the General Statistics Office in Hanoi today. That’s faster than an 8.92 percent increase the previous month. Prices rose 1.05 percent from September.

Vietnam has devalued its currency three times in the past year as policy makers sought to cut the trade deficit. The dong’s weakness may fan inflation, which has held above 8 percent for nine consecutive months, exceeding the government’s target for this year.

“Inflation is on the rise again and we expect it to top 10 percent by year-end,” Dariusz Kowalczyk, a Hong Kong-based senior economist and strategist at Credit Agricole CIB, said in an Oct. 11 note. “Policy makers have ignored the fact that real interest rates have turned negative as growth seems to be their primary goal.”

Prime Minister Nguyen Tan Dung’s government is targeting economic growth of as much as 7.5 percent and inflation of about 7 percent next year. Gross domestic product may expand 6.7 percent in 2010, Dung told the National Assembly on Oct. 20.

Dong, Stocks

The State Bank of Vietnam weakened the currency’s reference exchange rate by 2 percent in August, citing the need to curb the trade shortfall.

The dong traded at 19,495 per dollar in the interbank market as of the close in Hanoi yesterday, from 19,099 when the central bank devalued the currency. The Ho Chi Minh City Stock Exchange’s VN Index rose for a second day, adding less than 0.1 percent to 445.21.

“The Vietnamese dong weakness will continue to push up inflation,” Alan Pham, the Ho Chi Minh City-based chief economist for VinaSecurities, said in a monthly research note received on Oct. 15. “The possibility of another devaluation in the 2 to 3 percent range cannot be ruled out.”

Overall food prices rose 11.91 percent in October from a year earlier, and climbed 1.32 percent from September.

By Jason Folkmanis & Nguyen Dieu Tu Uyen - Bloomberg - October 23, 2010

Dollar dearth dampens Vietnamese dong

Due to concerns about a possible year-end dollar drought, and rumors about expanding the exchange rate between the Vietnamese dong the dollar, the unofficial exchange rate rose sharply this week.

Meanwhile, firms find it hard to buy dollars at prices fixed by the State Bank of Vietnam.

The dollar rose as high as VND20,020 at gold shops in Hanoi on Wednesday, compared to 19,900-19,980 on Monday. Meanwhile, commercial banks were selling dollars at 19,400- 19,500.

Economist Ngo Tri Long, former deputy head of the Market and Price Research Institute, gold prices have affected the exchange rate. “With the high price of gold, some people have accumulated dollars to smuggle gold, and then resell it on the domestic market at a profit,” Long said.

The domestic price of gold rose to VND33.09 million per tael on Thursday morning, compared to VND32.97 million on Wednesday, according to SJC, the country’s top gold trader.

The dollar price also increased as businesses scrambled to accumulate dollars to repay greenback loans taken out early in the year. Importers need dollars to serve production and business, which often jumps at the end of the year.

Meanwhile, exporters who are paid in dollars by foreign partners have only agreed to sell them to banks at high prices, or keep them in deposit.

Nguyen Manh, director of the business department at Bank for Investment and Development of Vietnam, said people are accumulating dollars due to worries about another devaluation of the dong.

The State Bank of Vietnam’s reference rate at 18,932 has not changed since the dong was devalued by 2 percent in August. The currency may fluctuate up to 3 percent on either side of the rate, which means it can be traded as low as 19,500 per dollar.

Many firms said it is difficult for them to buy dollars at commercial banks, and some reported having to pay additional fees. As a result, the actual market price is often higher than the official reference rate.

Dao Duy Kha, vice general director of the Vietnam Plastics Corporation, said: “Firms have to queue up for dollars at commercial banks to cover imports. Banks were offering dollars at the official rates but requesting additional fees from buyers, bringing the actual rate to as approximately high as unofficial market prices.”

His firm’s exports are small, so its greenback earnings are not enough to cover import materials, Kha said.

The central bank governor Nguyen Van Giau said the central bank has no plans to adjust the dong exchange rate against the US dollar, even though the dong’s value has been dropping on the unofficial market.

Jayant Menon, an economist from the Asian Development Bank, said Vietnam is running a trade deficit so implementing some sort of controlled depreciation of the currency to improve competitiveness is not a bad idea. However, Menon said that erratic drops in the value of the dong, caused by lack of confidence, pose a cause for concern.

“In the current context of consumer price hikes, widening exchange rates (between the dong and dollar) could push up inflation,” said economist Long. “The country should be very careful in considering devaluation at this point,” he said.

By Ngan Anh - Thanh Nien News - October 22, 2010