l Global Research l

On the Ground | 07 :30 GMT 25 February 2011

Vietnam – Putting on the brakes, finally

 The government has finally switched its policy priority from growth to inflation
 This i s much needed to ensure VND stability, even at the cost of slower growth
 Inflation pressure from external source s, food and energy in particular, remains elevated
 We maintain our 2011 growth forecast for now, while observing the efficacy of new measure s

Summary
The 7% devaluation of the Vietnamese dong (VND) against the US dollar (USD) on Tai Hui , +65 6596 8244
Tai.Hui@sc.com
11 February 2011 did little to ease market concerns on further VND devaluation. The
parallel market was trading at around VND 22,000 to the USD, compared with 21,300
before the devaluation. We attribute this pessimism to market concerns about the
inflation risk in Vietnam and subsequent undermining of the value of the VND. Hence,
we called for interest rates to be raised and measures to be taken to cool the
economy (see On the Ground, “Vietnam – Vietnamese dong devalued”, 11
February 2011).

On 18 February, the central bank announced a 200bps rise in the refinancing rate to
11%, followed on 22 February by a rise in the 7-day reverse repo rate to 12% from
11%. The government also unveiled a series of policies on 24 February aimed at
cooling the economy. These include further reductions in money supply and the loan
growth target, as well as fiscal tightening.

We see these measures as a positive, and necessary, step to stabilising local

confidence in the VND. After getting off to the right start, the government will now
need to ensure consistent and transparent implementation. With global commodity
prices, especially food and energy, under upward pressure in recent months, the
government‟s fight against inflation will not be easy, especially since the domestic
economy is probably running close to full capacity. We are maintaining our economic,
FX and interest rate forecasts for now, while observing the efficacy of these policies.

Table 1: Standard Chartered quarterly and annual forecasts for Vietnam

Forecasts (end-period) Q4-10A Q1-11 Q2-11 Q3-11 Q4-11 2010A 2011 2012 2013
Real GDP (%, y/y) 7.7 6.9 7.5 7.2 7.1 6.8 7.2 7.0 6.5
Inflation (%, y/y) 10.8 11.8 12.6 14.3 12.9 9.2 12.9 9.5 8.0
11.0 12.0 12.0 12.0 12.0
Base Rate (%, year end) 9.0 12.0 9.0 10.0
(10.0) (11.0) (11.0) (11.0) (11.0)
USD-VND (period end) 19,500 20,900 20,900 21,800 21,800 19,500 21,800 22,000 21,500
2Y VGB yield (%, period end) 10.7 11.75 12.25 12.50 12.50 10.70 12.50 - -
5Y VGB yield ((%, period end) 11.3 12.00 12.5 12.75 12.75 11.3 12.75 - -
Sources: CEIC, Standard Chartered Research
(previous forecasts in brackets)

Important disclosures can be found in the Disclosures Appendi x

All rights reserv ed. Standard Chartered Bank 2011 research.standardchartered.com
On the Ground

Right intention needs right implementation

Inflation risk in Vietnam, and Asia,
is rising and monetary tightening is
much needed.
The government has laid out its revised economic policy objectives (see Table 2).
Some of the revised targets for 2011, including lending and money supply growth
and fiscal revenue, have been tightened further since the revised policy objectives
were approved by the National Assembly. We see these new objectives as finally
addressing the issue of demand side inflationary pressure. The next question now is
whether implementation will be consistent and transparent, which will help to calm
market sentiment on the VND.

In particular, the threat of inflation continues to rise both from external and domestic
sources. Vietnam is particularly vulnerable to high global food prices (see On the
Ground, “Asia – Who is at risk from food inflation?”, 2 February 2011). Headline
inflation could rise by another 2-3 percentage points if oil prices surge and are
sustained at USD 150 per barrel, albeit this is not our core scenario. With the VND
under devaluation pressure, increasing currency strength to curb imported inflation is
not an option, at least for now. Hence, the government needs to focus on domestic
inflation and reducing monetary growth, and the negative fiscal impulse of cutting the
fiscal deficit is a good start.

Table 2: Measures announced to improve macroeconomic stability

Policy area Details
1) Raised refinance rate by 200bps on 18 February
2) Keep 2011 credit growth to less than 20%, despite parliament-approved target of 23%
3) Limit M2 money supply growth to 15-16% this year
4) “Acti vely, fle xibly and effectivel y” manage monetary policy tools, especially interest rates
Monetary policy
5) Manage FX market flexibly
6) Greater management of the gold market
7) State Bank of Vietnam governor was quoted as saying that the real deposit rate should be
at 0.5% to 1%
1) Try to raise fiscal revenue 7-8% higher than target set by National Assembly (VND 595trn,
or 26% of GDP)
2) Reduce fiscal deficit to less than 5% of GDP
Fiscal policy 3) Reduce public spending by 10%, including reducing state investment, suspending
purchase of new state cars, office supplies, and reducing electricity and telecommunication
expenses in government.
1) Limit trade deficit to less than 16% of exports
Limit trade deficit
2) Limit lending to imports that do not assist exports
Sources: Reuters, Standard Chartered Research

Chart 1: Mone y supply and lending growth Chart 2 : Inflation still on the way up

60 50

50 40
40
30
30
%

20
20

10 10

0 0
2003 2004 2005 2006 2007 2008 2009 2010 2011 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
(official
Broad money supply growth Lending growth target) Inflation Food component

Sources: IMF, Standard Chartered Research Sources: CEIC, Standard Chartered Research

GR11JA | 25 February 2011 2

On the Ground

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recommendations or views contained in this research report. On a general basis, the effic acy of recommendations is a factor in the performance
appraisals of analysts.

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Document approv ed by Data av ailable as of Document is released at

Tai Hui 07:30 GMT 25 February 2011 07:30 GMT 25 February 2011
Regional Head of Research, South East Asia

GR11JA | 25 February 2011 4