Current inflation triggered by price, not money | Business
Saigon Investment interviewed Dr CAN VAN LUC, Member of the National Financial and Monetary Policy Advisory Council, to discuss this issue in more detail.
JOURNALIST: – Sir, what do you think of the impact of world commodity prices on Vietnam during the first months of the year?
Dr CAN VAN LUC: – World Bank figures show that from the beginning of the year to April, world energy prices increased by 30%, while the prices of other raw materials increased by 16%. Vietnam imports various products, making it impossible to avoid an impact. Over the past four months, the Consumer Price Index (CPI) has climbed 1.27%, compared to 2.7% in the same period in 2020. Also in the past four months, average inflation only rose 0.74% from the same period in 2020. In fact, the CPI has not seen a strong increase in the past four months due to weak demand and a cycle currency conversion rate (CCC) slow. Therefore, inflation has been triggered primarily by prices rather than currency factors from now on.
Price-triggered inflation can be seen in logistics costs, which are now much higher in Vietnam than in other ASEAN countries and 1.3 or 1.5 times higher than the world average, while Logistics costs account for a large part of product prices, up to 30% to 35% of the total value of several products, negatively affecting price increases and inflation in Vietnam. If the price of exported rice or food products increases by 10% compared to 2020 due to the increase in logistics costs, for example, the price of rice in the domestic market will also increase by around 12% to 15%, causing the CPI to rise by 0.4 or 0.5 percentage point.
– Sir, you said that currency-triggered inflation is still quite modest, but cheap money seems to come with some unpredictable risks, such as earth fever and exploding money flows in the stock market over the past few months. What is your opinion on this?
– Regarding the currency issue, I guess there are potential risks and complexities for two major reasons. First, the cash supply is moderate, but inefficient use of capital will put long-term pressure on inflation, especially the money supply (M2) / GDP ratio in Vietnam, which is comparatively high at 138%, higher at the ASEAN average, when the Vietnamese credit market size at the end of 2019 was around 138% of GDP compared to 86% of GDP in ASEAN-9. The ICOR in Vietnam between 2016 and 2020 was considerably higher than regional figures and World Bank standards for developing countries.
Second, cheap money continues to flow into real estate and securities and has become one of the main causes of fever in these markets in recent months. In the real estate market alone, prices in 2020 climbed 20% to 30%, well above the global average of 5.6%. Land prices have skyrocketed in areas where there are plans to develop new infrastructure, airports or jetties. Now the relevant agencies have identified the problems and taken strong action to resolve them effectively.
As for the stock market, stock prices have risen sharply since the start of the year due to sources of cheap capital from low interest rate government aid programs. The stock market is on shaky ground as the link between the stock market and the real economy has weakened. The herd mentality and financial leverage have always existed, especially in the Vietnamese stock market. These are factors of instability, and the Ministry of Finance and State Bank of Vietnam recently issued warnings and succeeded in restraining the cash flow from these sources.
– Sir, what do you think can reduce the tire pressure?
– I think the first thing is the macroeconomic base with stable exchange rates. At present, Vietnam’s big balances such as public debts, budget deficits and trade balance are better than before, as well as better control of the inflation rate below 4% in the five recent years, a supply and demand for stable currencies and better control of gold. market. All of these factors, together with increasingly flexible exchange rate management policies, have helped keep the exchange rate stable.
The second thing is an increasingly effective combination of currency, exercise, and pricing policies, like the issuance of government bonds over the past two years. Third, the CPI calculation is moving closer to international standards, with less and less essential foods and groceries included, improving long-term inflation stability and preventing all kinds of shock price hikes. Fourth, demand is still low in CCC as well.
However, inflationary pressure is still high this year. Therefore, I firmly believe that it is essential to manipulate the cash flow so that it flows into key economic areas and to continue to take measures to control the price of real estate, especially land. because land fever can seriously affect investors and the market. It is also important to improve monetary and fiscal policies and to adopt flexible policies for controlling inflation and economic growth, for short, medium and long term plans in order to solve problems appropriately, effectively implement monetary and fiscal policies and better control the markets. , in particular the bond market. It is important to continue to improve the health of the corporate bond market, reduce the pressure on credit capital, and diversify the channels for fundraising and distribution of capital in the economy.
However, it is necessary to take into account global financial risks and uncertainties, assess the effects and propose appropriate measures for Vietnam. In addition, we will develop a digital economy, with electronic distribution channels and cashless payments that will allow us to successfully contain the pandemic and ensure that goods are delivered as planned. These will reduce the inflation pressure.
– Thank you so much.